Shell faces a major credibility problem: Management and the board let the problems in its portfolio--huge bets on shale despite this being far from a core competence, cost overruns on key projects (the Motiva refinery, for example), and a chronically poor-performing downstream--fester for so long that the market has lost faith in the company's execution. Shell's management and board have been painfully slow in addressing the weaknesses. Even though some actions are now being taken--a new CEO has been brought in, shale investment is being cut and acreage sold off, a few refineries will be sold, and so on--it's nonetheless concerning how long it took for these decisions to be made. We can't help but think the better-run large-cap oil firms would have recognized and addressed such operational weaknesses far more quickly.
Given all of the operational issues of late, should Shell make some bold strokes that truly improve results, its stock could easily outperform its peer group in the coming years. Surely that's what the board is hoping new CEO Ben van Beurden is capable of achieving. But the task he faces is daunting: $30 billion spent buying acreage in more than a dozen shale plays has only led to two positions that hold much value (the Permian and Duvernay). This $30 billion of shale capital expenditures has not generated a plethora of growth options for Shell. Instead, Shell will have to largely look elsewhere in the coming years for value-creating upstream growth. Further, Shell's refining footprint is very poorly positioned, largely located in markets (Europe) with structural problems that make generating decent returns an extremely daunting task.
Finally, Shell's issues of poor execution and capital efficiency predate ex-CEO Peter Voser. Thus far, van Beurden has been pretty impressive, but investors should not expect miracles; small improvements are indeed likely, but Shell is far more likely to be a laggard than leader among the oil majors for the rest of this decade.
|Economic Moat||Fair value||Stewardship Rating|
Energie - olie en gas geïntegreerd
- Investor sentiment on Shell today is decidedly negative after years of poor execution. If new CEO Ben van Beurden can shake things up enough to where Shell operates in line with its peers, it could prove to be a material near-term share catalyst.
- Robust cash flow generation in the coming years remains on track, and near-term dividend growth looks achievable.
- Shell’s downstream has been a chronic underperformer, but this also offers the prospect of materially improving cash flows and returns if cost savings and efficiencies that are being targeted can be realized.
- Shell's big shale bets have been a major bust, crushing the profits and returns of its upstream operations in North America. This is likely to be a drag on returns for years unless gas prices stage a major rebound.
- Europe is a terrible region for refining and chemicals and Shell has a lot of exposure there. Management has been slow to restructure operations here, and this will thus remain a drag on returns.
- Shell has upped its annual exploration budget by billions of dollars, but its track record in this area is mixed and there’s a risk this will not be value accretive spending.
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