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The Transformation Prospects For Royal Dutch Shell Plc

It wasn’t entirely surprising that Shell‘s (LSE: RDSB) (NYSE: RDS-B.US) profit warning barely raised an eyebrow among market followers. The company’s share price subsequently dropped just 1.5% in a flat market with nothing about the warning coming as a revelation.

The market only looks forward, and with the problems facing Shell long understood, there was no need to suddenly dump shares at once and in a hurry.

Court cases and cutbacks

Shell had already had a tough Q3 with earnings falling by a bigger than expected amount of $4.2 billion from $6.2 billion last year. Partially to blame for this was higher exploration costs and lower volumes of natural gas and oil.

Another setback is a US court ruling which is to curtail Shell’s hopes of drilling in the Arctic waters off Alaska this summer. While the Anglo-Dutch oil group offered no comment on the case, the timing is at a moment when new chief exec Ben Van Beurden is reviewing the future of a range of the companies high-cost activities.

Stripping out the fat in the business while focusing on adding shareholder value through uplifts in exploration is key. In the case of the former Shell have already axed a $20 billion plan for a gas-to-liquids project in Louisana , while in the case of the latter, the recent court case is obviously a stumbling block.

A sure dividend

Shell has committed to its dividend payments for the foreseeable future. Depending on if you have a favourable outlook on the global economic recovery then oil demand should rise, with dividend payouts steadily increasing.

Shell’s decision to try and boost capital efficiency is also encouraging here. The oil giant is selling its stake in a gas project in Western Australia for $1.1 billion as part of a drive to improve returns on investment. Shell is set to sell $30 billion of assets this year in a disposal plan that represents 17% of Shell’s total net assets. This extra cash should make Shell’s 5% dividend more than safe.

Shells share currently trade on a P/E of 11. Justifiably, the big oil companies have lower than average earnings multiples based on the volatility of their earnings, but not much could actually change at present and Shell owners benefit handsomely.

For instance, a period of wider panic in the market could see investors flock to a steady rock like Shell. Alternatively, you may feel that Ben Van Beurden, the new chief executive, must do more than tighten the company’s belt if the group are to bounce back this year.

While that dividend looks tasty, you may disagree with Shell’s intrinsic value, and want a better value proposition to go along with your dividend.

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> Mark does not own shares in Shell.