The Royal Dutch Treatment
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As peak oil approaches, exploration and production majors are finding it more and more difficult to find new oil field resources to exploit. Jim Rogers -- of Quantum Fund, globe trotting, China bull and commodity guru fame -- can be regularly found on television pointing out that very few new major oil finds have been discovered in the past decade. As a result, companies with no strategy for moving into less traditional production models are in danger of gradually losing their status as reliable profit growth engines as expenses ramp up on traditional oil production and alternative energy creeps into play.
Royal Dutch Shell (NYSE: RDS-A) is one of the companies that is adjusting to an emerging new paradigm in energy. As increased energy demand from developing nations, particularly China, have led it and ExxonMobil (NYSE: XOM) to likely surpass $500 billion in sales in 2012, Shell is moving to secure its next big profit center: natural gas.
While natural gas prices languish in America, throughout the globe, prices remain strong. This has led Shell to make multiple acquisitions and strategic moves to greatly expand its natural gas footprint. Recently, Shell has partnered with PetroChina (NYSE: PTR) to exploit shale gas in China. An older project in Shaanxi province in 2011 produced 3.5 billion cubic meters of natural gas, bringing total production of the field to over 18 billion cubic meters. Two weeks ago, Shell struck a deal with PetroChina's parent company China National Petroleum Corp. to share production in the Sichuan Basin, which appears to be a prolific natural gas play.
In Qatar, Shell has two major natural gas projects. Qatargas 4, which began production in early 2011, is one of the world's largest Liquefied Natural Gas (LNG) facilities producing up to 280,000 barrels of oil equivalent per day. Its major customers are India, China and Europe. There is no looming shortage of demand. Shell is now exploring opportunities for LNG in America.
Also in Qatar, Shell recently finished building the Pearl Gas-to-Liquids plant for producing cleaner burning fuels from natural gas. While the price tag exceeded projections, topping out near $19 billion, the project is on-line to produce 120,000 barrels a day of fuel and can reach 320,000 in the future. Pearl will add about 8% to Shell's production globally.
Shell is currently looking at a similar project to Pearl in Louisiana. Now that the company has moved up the learning curve on this innovative approach to utilizing natural gas, it expects a lower cost build out on its next project. With the glut of natural gas in America, such a plant could add massive profits for Shell as the United States is slow to move away from fossil fuels in transportation.
Shell has a strong return on equity of nearly 19%, which portends well for the future. The company pays out a dividend of $3.36 per share, which yields about 4.8% from recent prices. It uses only one third of its cash flow to pay its yield and has raised dividends most years, though has slowed increases recently as it has reinvested in the company and engaged in share buy-backs.
Shell's return on capital is about 11%, which places it middle of the pack among oil majors. This, I think largely reflects the company's recent spending and transition in progress. As production continues at the newer natural gas facilities, I would expect that number to drift higher toward 13-14%, which would be higher than all but a few companies.
Royal Dutch Shell is a wonderful addition to a portfolio needing stable dividends and a guide along the path to a different type of energy future.
Kirk Spano and clients of his Wisconsin Registered Investment Advisor Bluemound Asset Management do not own positions in any company mentioned in this article. Neither Kirk nor Bluemound clients have made any transactions in the previous 3 days or plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting or see his watch lists at www.GalpInvesting.com.
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