One Reason Why I Wouldn’t Buy Royal Dutch Shell plc Today

Today I am looking at why I believe Royal Dutch Shell’s (LSE: RDSB) (NYSE: RDS-B.US) asset firesale looks set to undermine earnings expansion.

Project divestments bode ill for long-term growth

The consequences of the intensifying political crisis in Iraq has once again put oil stocks back in vogue. With Islamic rebels banging on the door of Baghdad as well as the black gold hotbeds of the South, Brent crude has leapt to fresh nine-month peaks above $115 per barrel in recent days.

With a resolution in the Middle East likely to prove a difficult, and most likely drawn out, affair to deal with, the stage is set for oil prices to continue rising in the near-term at least. Still, I believe that Royal Dutch Shell is a poor choice for those looking to gain exposure to rising fossil fuel prices as its rolling divestment scheme hollows out its earnings prospects in coming years.

In its latest such move, the company announced late last week that it had dramatically slashed its stake in Australia’s Woodside Petroleum — royal dutch shellthe country’s biggest oil and gas producer — to just 4.5% from 23.1% previously. The move will bag the British company $5bn in which to boost its hefty cash pile.

Shell has spun off a multitude of upstream and downstream assets in recent years in order to build its dividend and share repurchase-supporting cash pile and reduce its exposure to non-core assets. The oil giant also offloaded its Australian Geelong refinery and almost 900 pump stations in Australia to Vitol for $2.6bn back in February, and follows other downstream sales including that of its liquefied petroleum gas (LPG) operations in the Philippines late last year. The business has also offloaded upstream assets from the UK to Egypt and across Scandinavia over the past 12 months.

The effect of this severe asset cutting caused total output during January-March to drop 9% to 3.3 million barrels of oil equivalent per day, and the company has hinted at further divestments to come.

Undoubtedly a sluggish global economic recovery is expected to result in a worsening oil market imbalance in the next few years. But I believe that over the long-term, as Western economies continue to recover and emerging nations hurdle current stagnation, Shell could be left sitting on its hands demand recovers and the current current cash-building drive leaves its growth prospects out to dry.

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> Royston does not own shares in Royal Dutch Shell.