Can Royal Dutch Shell Plc Make £20 Billion Profit?

royal dutch shell

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) to ascertain if it can make £20 billion in profit.

Have we been here before?

A great place to start assessing whether or not Shell can make £20 billion in profit is to look at the company’s historic performance. It would appear that the closest Shell has ever got to a £20 billion profit was back during 2007, just before the financial crisis when the price of oil surged to a record high of around $140 per barrel.

Unfortunately, since 2007 Shell has never been able to return to this level of profitability despite growing in size. In particular, since 2007 Shell had added more than $100 billion of assets to its balance sheet and shareholder equity has increased 52%. However, over the same period the company’s return on assets has slumped from 11%, to only 7%.

But what about the future?

Shell’s performance during the past few years has been hampered by non-performing assets. Specifically, 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 and numerous downstream assets. 

Nevertheless, Shell’s management is on the warpath and has drawn up plans 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. 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.

Actually, this efficiency drive is already well underway. In the past few months Shell has announced that it will sell assets in the North Sea, 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.  And in the past week alone, Shell has sold its stake in a Brazilian oil field worth $1 billion ad cancelled Arctic drilling plans.

All in all, this reorganisation should boost profits, although Shell’s overall performance is still dependent upon the price of oil. Still, as oil is a commodity that is running out, it is likely that its price will only move higher over time, indicating that over the long-term Shell’s profits will return to 2007 levels. 

Foolish summary

So overall, I feel that Shell can make £20 billion profit.

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In the meantime, please stay tuned for my next verdict.

> Rupert does not own any share mentioned within this article.