Sanford C. Bernstein & Co. Analyst Oswald Clint recently upgraded Royal Dutch Shell plc (ADR) (RDS.A) to an “outperform” rating. He says his upgrade was based in part on Shell’s decision to reduce spending on unconventional shale resources in North America.
“I guess we watched a lot of money being spent to the tune of $26 billion, and we weren’t quite sure that the results from that expenditure would equal growth, higher returns, or even returns that match the returns of their North American business, which has been 20% return on capital for quite a period of time,” Clint says. “We felt it was too much of a move in the wrong direction and it would dilute the returns from a strong business line, and that’s what got us cautious on the stock through 2012, 2013 and some part of 2014.”
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Recently, Shell has changed its strategy with respect to that business line, Clint says. In addition to reducing capex, he says Shell announced a divestiture plan that is refocusing on only the best parts of that portfolio. He believes the worst is behind the company.
“What they are left with is reasonably high quality, and we now expect returns in that business to improve from here,” Clint says. “So combined with valuation, the dividend yield, the balance sheet, strong portfolio, but this improving North American business plus also some exploration success, which we haven’t seen in almost 10 years, that created a more positive, constructive investment case, and that’s why we took that decision to upgrade it.”
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