Saturday, September 6, 2014

Royal Dutch Picks A Page Out of Exxon's Playbook

Royal Dutch Shell plc appeared to be one of the relatively cheap stocks among the global intergrated majors; at the start of 2014, the share price of 20 EUR was below the 52 week low as of today. For the rest of 2014 year-to-date, the share price has rallied to the upper end of the 52 week range.

Why? Exciting new discoveries in existing territories?  Another super giant oil field in the Saudi Empty Quarter? A huge new gas field in the U.S. Gulf?  None of these.

No, it was probably a couple of speeches by new CEO Ben van Beurden in which the WSJ has him saying,
"We cannot deny that our returns are too low," Mr. van Beurden said. "We don't have a [production] volume or capital-employed target. What I want to show is that we can grow free cash flow."
The new message has resonated with Wall Street, as the Journal writes again,
Since he said in January that Shell needs "better operational discipline," the company's shares have climbed 5.8% and hit a two-year high last week. Shell's 2013 earnings fell 38% from a year earlier to $16.8 billion, while its capital spending was 15% over initial projections, at $46 billion. Shell's refining profit was "simply too low" and the company's performance in North America wasn't acceptable, Mr. van Beurden said at the time."
The emphasis on ROIC is a page right of Exxon's top corporate board, management, and operators' metrics. which we have written about for years.  It's one thing to talk about 'operational excellence,
but pushing a return on invested capital mentality, translated down to the operating company level is something else entirely.

If RDS gets the Exxon playbook into its DNA, it will go from a stock that always looks relatively inexpensive to one that is 'fairly valued," which is a good thing.

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