Royal Dutch Shell plc’s $20bn U-turn Is Great News For Shareholders

Management at Royal Dutch Shell plc (LON:RDSB) is walking the talk when it comes to thinking of shareholder returns.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Giant resource companies like miners and integrated oil behemoths don’t have a great track record of prudently stewarding capital for the benefit of their shareholders.

Quite the opposite — they have a reputation for blowing money in booms and going near-bust in downturns.

I’ve even heard mining bosses accused of ‘being addicted to big holes in the ground’. For oil and gas companies, the equivalent is perhaps platforms and refineries as far as the eye can see, like an environmentalist’s worse nightmare.

Recently, though, the majors have been talking a new game. The bosses at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) for example have claimed that returns for shareholders are now their top priority — ahead of the old growth at all costs way of doing business.

It sounds logical, but it’s been hard to square with what the company has actually been doing — which is spending its way towards a $130bn goal for net investments over 2012-2015, including acquisitions as well as capital expenditure.

In October it said it would spend $45bn this year alone!

You can be sure Shell was unsure

All this makes Shell’s recent change of plan in Louisiana so encouraging. The company was set to spend an estimated $20bn on a gas-to-liquid plant, a figure already much higher than previous $12.5bn cost estimate made just a few months ago.

But Shell has changed its mind. Now it’s spending $0 on the project. It’s pulled away from it entirely.

Analysts have been quick to speculate about what this means for US energy prices. There’s a rash of projects under way along the Gulf coast that are set to capitalise on the country’s oil and shale gas bonanza. If Shell thinks the numbers don’t stack up, then presumably it thinks petrol prices are set to fall. Equally, it might be worrying that gas prices won’t go much lower – it didn’t own the gas that would have fed the massive facility (unlike a similar one it’s already built — expensively — in Qatar) so it would have been at the market’s mercy when it comes to the going rate for gas.

All fascinating speculation, but I’m more interested in what it means for Shell.

Shell for shareholders

Put simply, I think this is concrete evidence that the company is serious about pursuing the projects with the highest payoff.

Shell had the financial firepower to push forward with this plant — even $20bn isn’t a terrifically big deal for the company.

It would have been the easiest thing in the world to green-light the project and leave someone else to see how the sums stacked up later. In the ‘get big or go home’ world of the oil giants, that’s long been a default option — especially when you’ve set yourself that whopping $130bn spending goal.

But Shell hasn’t done this. CEO Peter Voser said on revealing the news that it was withdrawing its involvement that:

“We are making tough choices here, focusing our efforts and capital on the most attractive opportunities in our world-wide portfolio, to add value for shareholders.”

You wouldn’t have thought it’d need saying, but in the world of resource giants it does.

Exxon-erated

So Shell seems to be changing its spots. It already pays a good dividend equivalent to a yield of 5.3%, and almost every day it buys back more of its cheap-looking shares — the company is on a P/E ratio under 9 — which should be accretive to earnings going forward.

Shell will probably spend much of the $20bn it has freed up here on other projects — it has just got approval from the Canadian government to expand production at its environmentally controversial oil sands project in Alberta, for example. But if it spends it more slowly, and more carefully, that must be a good thing. Caution might not help Shell become the biggest player in the industry, but as shareholders we’re interested at getting the most bangs for our buck.

Besides, prudent capital allocation hasn’t hurt US rival Exxon Mobile Corporation (NYSE: XOM.US). With a market cap of $418bn, Exxon is the biggest listed company in the US but it’s also got an enviable record of making money for shareholders.

Since the turn of the century, Exxon has achieved an average return on capital of 20.7% (according to figures from CapIQ) compared to the 14.2% posted by Shell. Cancelling the Louisiana project may be a significant step in closing that gap for the British-Dutch giant.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Owain owns shares in Royal Dutch Shell.

More on Company Comment

Hand of person putting wood cube block with word VALUE on wooden table
Company Comment

Value has been building behind the Diageo share price

Despite the business growing, the Diageo share price first reached its current level just over 19 months ago and hasn't…

Read more »

Older couple walking in park
Investing Articles

5 stocks to buy for high and rising dividend income

I can see a host of shares to buy on the FTSE 100 offering me exceptional levels of income. Here…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I don’t care if FTSE 100 shares fall further, I’m buying them today

I'm happy to go shopping for FTSE 100 shares today, even though I accept that they could have further to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Rolls-Royce shares are down 18% in a month and I’m finally going to buy them

Investors who bought Rolls-Royce shares have been repeatedly disappointed, but I'm willing to take a chance on them before they…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

How I’d invest £10k in a Stocks and Shares ISA today

Now looks like a good time to buy cheap FTSE 100 shares inside a Stocks and Shares ISA. These are…

Read more »

Black father holding daughter in a field of cows
Investing Articles

Today’s financial crisis is the perfect moment to buy cheap shares

I'm building a portfolio of FTSE 100 stocks by purchasing cheap shares whenever I see an opportunity. There's a good…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

I’d buy Tesco shares in October to bag their 5.4% yield 

Tesco shares have fallen lately but I think this makes them attractively valued for a dividend stock I would aim…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I'd love to hold it, but one…

Read more »