COMPANY DESCRIPTION

Royal Dutch Shell is an independent oil and gas company based in the Netherlands. Co. and its subsidiaries are engaged in the principal aspects of the oil and gas industry in over 80 countries. Such countries include Australia, Brazil, Brunei, Canada, China, Denmark, Germany, Malaysia, the Netherlands, Nigeria, Norway, Oman, Qatar, Russia, the U.K., the U.S. Co. is also engaged in bringing new oil and gas supplies on-stream from major field developments. Co. is investing in growing its gas-based business through liquefied natural gas (LNG) and gas-to-liquids (GTL) projects. In addition, Co. has a diversified and balanced portfolio of refineries and chemical plants. 

 

ECONOMIC MOAT

In our opinion, Royal Dutch Shell does not have a moat.  It relies on excellent execution for success. RDS is simply too high up the global cost curve and lacks meaningful exposure to high-quality U.S. oil and gas shale resources.  In addition, RDS downstream footprint is geographically disadvantaged and is underexposed to cost-advantaged markets such as the U.S. Gulf Coast and midcontinent.

 

OUTLOOK

Royal Dutch Shell's string of annual dividend increases is likely on hold. The sharp decline in oil prices will almost certainly pressure earnings in 2015, making it imprudent to hike the payout in the currently weak industry environment. The dividend doesn't appear to be in any danger in the near term, given Shell's strong finances. The company had been implementing an productivity campaign for a number of months before the downturn hit. That has led to more-efficient operations and targeted spending initiatives, rather than an open-ended approach broadly aimed at boosting volume. These top-quality ADRs offer very good 3- to 5-year total return possibilities. Of course, much depends on a partial recovery in oil prices, which we assume will occur in the years ahead.

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