Analysts Downgrade Troubled Shell

Given Mornigstar's view that long-term oil prices will be well below $100 going forward, we don't believe Shell's has a lasting competitive advantage over its peers

Stephen Simko, CFA 27 May, 2015 | 12:14PM
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Shell (RDSB) faces what amounts to an almost existential crisis: even when oil prices were $100 its portfolio was strewn with problems. Huge bets on shale destroyed huge amounts of capital, cost overruns on key projects such as the Motiva refinery, and a chronically poor-performing downstream all combined to leave the company with very weak returns on capital.

We have recently lowered our Shell fair value estimate to £20.50 per share from £21 per share to reflect what we believe was an overpayment with respect to its planned acquisition of BG Group.

The implied £13.50 offer price is roughly 11% above our £12 BG fair value estimate. We risk the valuation impact of the deal by 5% to reflect the possibility that it does not go through as anticipated. Regulatory or antitrust approvals are needed from the European Union, Brazil, China, and Australia. If all goes to plan, this acquisition will close in 2016.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Royal Dutch Shell PLC B1,362.80 GBX2.84Rating

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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