Shell Will "Struggle to Overcome" Oil Price Crash, say Analysts

Improvements are likely at Shell, say analysts, but the firm is far more likely to remain a laggard than become a leader among the oil majors for the rest of this decade

Stephen Simko, CFA 26 October, 2015 | 9:00AM

Even when oil prices were $100 a barrel, Shell's (RDSB) portfolio was strewn with problems. Huge bets on shale destroyed huge amounts of capital, and the company's upstream resource base has few growth options with strong economics, the low-cost Brazilian oil it is acquiring from BG (BG.) is the one major exception.

The company's chronically poorly performing downstream also has been a consistent drag on returns on capital. Even though significant restructuring actions have begun under new CEO Ben van Beurden, the recent collapse in oil prices adds considerable pressure that we think the company will struggle mightily to overcome. After all, Shell's issues of poor execution and capital efficiency predate even ex-CEO Peter Voser, who was responsible for a lot of the poor recent strategic choices.

Thus far, van Beurden has done all he can, and oil companies surely will be able to cut costs significantly from here to better align themselves with the new oil price environment. But investors should not expect miracles; Shell isn't Exxon or Chevron and probably never will be. Improvements are indeed likely, but the firm is far more likely to remain a laggard than become a leader among the oil majors for the rest of this decade.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Royal Dutch Shell PLC B1,479.60 GBX9.41

About Author

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

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