The FTSE 100 has risen 53% during the last five years, however, Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) one of the index’s largest constituents, has underperformed by a staggering 27%.
What’s more, compared to its larger peers, Exxon Mobil and Chevron, Shell’s shareholder returns have been less than impressive. In particular, aside from the company’s dividend yield, which is around the same as the industry average, since introducing a script dividend back during 2010 Shell has issued around $4 billion more stock than it has brought back.
It’s not just the company’s shares
And it’s not just Shell’s shares that have been underperforming. Indeed, according to the Financial Times, around one third of Shell’s assets, are not producing a positive return-on-investment. The assets dragging on Shell’s balance sheet include the company’s $8 billion share in the huge Kashagan oilfield, half of the company’s shale oil business within the United States (worth a total of $24 billion) and numerous downstream assets.
Time to do some pruning
However, Shell’s new chief executive, Ben van Beurden is planning on making some changes, which look as if they will change the company for the better. For example, Mr Beurden has drawn up a plan to divest $15 billion worth of assets within the next few years. The idea is that these disposals will allow Shell to shed some inefficient assets, while using the cash raised to fund new projects.
As a matter of fact, the first wave of cuts has already started. Specifically, Shell announced earlier this week that it was going to sell some assets within the North Sea. Furthermore, Shell has cancelled plans to build a multi-billion dollar gas-to-liquids plant in Louisiana US and has started strategic reviews of the company’s Nigerian and shale oil businesses in the United States.
What’s more, some City analysts actually expect that $15 billion in divestments will not be enough, predicting that the final total will be closer to $30 billion.
Positioning for growth
Nevertheless, despite these cuts Shell is planning to spend around $55 billion developing new projects during the next two years.
Moreover, some City analysts believe that when this reorganisation is complete, Shell’s management will refocus its attention to improving shareholder returns. Actually, there should be plenty of room for additional returns as Shell currently generates so much cash that is one of the few members of the Big Oil club that is currently able to finance both capital spending and dividends from operating cash flow.
Foolish take away
All in all, it would appear as if the changes currently going on at Shell will change the company for the better . Indeed, as the company sheds underperforming assets and brings new projects into production, Shell’s profitability should only improve and shareholders will benefit.
