Royal Dutch Shell Plc’s Greatest Weaknesses

Two standout factors undermining an investment in Royal Dutch Shell plc (LON: RDSB).

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.

royal dutch shellWhen I think of oil-giant Royal Dutch Shell (LSE: RDSB) (NYSE: RDS.B.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.

1) Cyclicality

If you’re in the business of finding and producing oil and gas, as Shell is, it’s a pursuit with an end product that has little pricing power and zero product differentiation. The firm’s profitability relies on the prevailing price of the commodity it sells into the market, whether that is in the upstream or downstream areas of its operations.

That makes the firm vulnerable to the effects of the supply and demand equation, which can affect trading results as the price of the commodity rises and falls as it pleases:

Year to December 2008 2009 2010 2011 2012 2013
Revenue ($m) 458,361 278,188 368,056 470,171 467,153 451,235
Net cash from operations ($m) 43,918 21,488 27,350 36,771 46,140 40,440
Adjusted earnings per share (cents) 509 160 304 461 432 266

I think the table shows the cyclical dip in cash flow and profits that occurred in 2009 as the company’s fortunes followed the macro-economic tide.

Despite operational progress that the firm may make, Shell has little control of the inherent cyclicality in its industry and that could jeopardise results for revenue, cash flow and, ultimately, the dividend returns for investors.

2) Dangerous operations

Drilling for oil is a dangerous business. We only need to look across at the firm’s rival BP and its 2010 Gulf-of-Mexico disaster to see how a drilling accident can financially cripple even a major oil company for years.

Shell takes similar risks to BP on a daily basis and because accidents don’t happen every day, it’s easy to become complacent about that. However, man’s ingenuity won’t always defeat the forces of nature and the next big oil disaster could be just around the corner. That’s one reason for big oil companies to sit on relatively low P/E multiples in my opinion.

What now?

Despite such concerns, Royal Dutch Shell seems set to perform well, financially, during 2014 and beyond. As such, the firm looks like a decent bet in the resources space for those investors seeking dividend income.

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.

Kevin does not own shares in Royal Dutch Shell.

More on Investing Articles

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »

Young Black woman using a debit card at an ATM to withdraw money
Investing Articles

Up 35% from this year’s low! Here’s where I think Lloyds shares are headed in H2 of 2024

My Lloyds shares are already doing well this year but that’s not guaranteed to continue. What factors could turn the…

Read more »

Investing Articles

Approaching £5, is there still growth ahead for the Rolls-Royce share price?

The Rolls-Royce share price has been flying in the last year. But is there more growth ahead or should investors…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi be a growth share to buy and hold?

Our writer explains why he thinks a newly-listed UK growth share could have a bright future -- and considers whether…

Read more »

A pastel colored growing graph with rising rocket.
Market Movers

The FTSE 100 jumps after the Bank of England meeting. Here’s what’s next

Jon Smith runs over the takeaways from the Bank of England meeting today and flags up which FTSE 100 stocks…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

How I’d start investing in great value UK shares with £10,000 today

Harvey Jones can see a heap of UK shares he'd like to add to an ISA today. Many combine low…

Read more »