Royal Dutch Shell A tale of two petroleum majors news story imageWhilst oil heavyweights BP (LON:BP.) and Royal Dutch Shell B (LON:RDSB) may be producing similar amounts of gas, BP’s higher levels of liquids production has recently put Royal Dutch Shell in the shade. With gas prices under pressure, it is no wonder that performance of Royal Dutch Shell shares have lagged that of its long standing rival; however with a recovery in natural gas prices on the horizon, long term earnings are well protected.

Although the picture is not grim, it could be construed that Shell is a victim of its own success. It was not that long ago that the bottom of the barrel seemed mighty close in terms of remaining US gas reserves. But not any more, with the US overwhelmed with discoveries of coal seam gas and shale gas.  The result of the global trend in finding huge gas resources in coal and shale is that the price of oil has soared relative to gas and looks set to keep outperforming gas for the foreseeable future. 

Here lies Shell’s problem. The company is more leveraged to gas than BP… hence the underperformance. Nevertheless the outlook for Shell is like the rest of the petroleum energy sector as demand for oil, gas and coal soars. There are many forecasts for the price of oil to reach US$100 per barrel before the end of 2010. If it does not reach that target in 2010, we certainly expect to see oil at US$100 or higher sometime in 2011. With regards bolstering the group bottom line, management are taking matters in to their own hands and are not relying on favourable macroeconomic conditions. After pruning costs by US$2 billion in 2009, the company is committed to lowering underlying costs by another US$1 billion in 2010.

The group’s downstream business contains several poorly performing assets and as such low margin refineries in Europe are under review for disposal. However, the better refining assets such as the Motiva refinery in Texas are being expanded and upgraded to accept the worst grade crude and produce a wider range of products. Shell also has options for growth in oil production. The company has various stakes in Gulf of Mexico oil plays which between them have potential to deliver 150,000 barrels of oil per…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here