Shell is cheap and on the road to recovery.
For several years now, both qualitatively and quantitatively, Royal Dutch Shell (LSE: RDSB) has brought up the rear.
BP leads the way
That's not to say, however, that the companies can't change positions, passing one another when things are going especially well, or falling behind when bad luck hinders them.
Take BP (LSE: BP) for instance. It wasn't long ago that the company was simultaneously trying to fend off the ramifications of a lethal explosion at a Texas refinery that killed 15 and injured scores of others, all while dealing with leaks in its Alaska pipelines. At about the same time its Indiana refinery was shut down by a fire, and an abrupt top management change all seemed to leave the company snookered.
But in just the past couple of years, CEO Tony Hayward and the team he's assembled have BP roaring back. In fact, the company is as clear-cut a demonstration of the real value of quality management to corporate success. And now it appears that Shell may be following in the footsteps of its European rival.
And here comes Shell
If, as the recent version of the company's annual strategy session appeared to indicate, Shell is shedding its ineptitude, still new CEO Peter Voser will have performed a miraculous feat. After all, this is the same company that in 2004 admitted to overstating its reserves by 20%, or about 3.9 billion barrels. The result for the company was a fine of more than $350 million, plus administrative costs and other charges, along with the termination of several top executives.
And then there's been the company's geologic incompetence. One of the keys to judging an oil and gas producer involves the percentage of its production it's able to replace each year. For instance, US giant Exxon replaced 133% of its production in 2009, departing the year with more reserves than it started off with. From Shell's perspective, as recently as 2007, the company replaced a shameful 17% of its production. In 2008, it replaced just 98% of its output.
Like a new company
Then came 2009 and surprise stardom for Shell. Believe it or not the company's reserve-replacement ratio reached a whopping 288%, the highest in the industry. And while that ratio hasn't yet manifested itself in Shell's financials, Mr. Voser and his team have set the stage for some solid results going forward.
For instance, next year two huge projects in Qatar -- the Pearl Gas-to-Liquids project and Qatargas 4, a massive liquefied natural gas project -- will come on stream. Also an expansion of the Canadian oil sands project that it shares with Chevron and Marathon will likely start up in the next couple of years. As Mr. Voser told the assembled analysts, the result could be an impressive 11% increase in barrels of oil equivalent production by 2012.
And it wasn't just the discovery of 2.4 billion barrels of oil equivalent, its top performance of the past decade, that made 2009 the company's turnaround story so strong. In addition, cost cutting received plenty of attention.
By laying off 5,000, or 5%, of its employees, along with taking other measures, Shell was able to save $2 billion in expenses during the year. Further, it appears that the company is far from through in the fat-trimming department. Indeed, Mr. Voser stated during the session that another 2,000 Shell hands will be laid off by the end of next year.
Wanna buy a refinery?
Beyond that, there will be asset sales as well. A month ago, rumours were rampant that the company was looking to dispose of about $10 billion worth of its properties, potentially including oilfields in the North Sea, three refineries in Europe, onshore acreage in Nigeria, and retail outlets in Africa. Whether or not that target number is accurate, the company made it clear on Tuesday that there will be refineries and retail facilities on the block.
Clearly this is not the ideal time to be in the refinery business, and, with margins having withered in that sector, all the integrated companies, from ExxonMobil on down, are struggling with their downstream operations. In fact, companies like France's Total, along with several other members of the Big Oil fraternity appear intent on cutting refinery capacity.
So all in all, particularly with its forward P/E of 8 and forward dividend of 6%, there could be some decent money to be made in this clear-cut turnaround situation.
More on the economy and the markets:
> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds and much, much more. Click here to download your reports today!
> This article was originally written by David Lee Smith, and published on Fool.com. It has been updated by Bruce Jackson.
