Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is among the largest oil and natural gas companies in the world. Despite its similarity to industry leaders, its dividend yield is roughly double that of giant Exxon Mobil Corporation (NYSE:XOM). The company looks well positioned to prosper in the future despite the inherent risks it faces, making it a top option in the oil patch for income oriented investors.
A Bitter Pill
Shell is a well-known brand and, generally, a well-respected company. However, a large reserve write down in 2008 didn’t do much for the company’s image with investors. That move has left the company in a position where it has to prove it is capable of executing. Unfortunately this “prove it” situation comes at the same time that finding oil and natural gas is getting harder.
These two issues are largely behind the company’s relatively depressed share price. However, in that is an opportunity. Knowing the big risks Shell faces is key to being comfortable with buying into this energy giant.
Finding New Reserves
Perhaps the biggest problem that Sell faces is finding new reserves to replace the oil and natural gas it pulls out of the ground. For example, in 2012 the company’s proved reserves were 13.6 billion barrels of oil equivalent, down from 14.25 in 2011. A falling number here is a bad thing because it means the company is slowly running out of product to drill and sell.
That said, Shell has made a massive commitment to natural gas throughout the world. This is similar to the move made by Exxon Mobil Corporation (NYSE:XOM) (notably with its purchase of gas focused XTO Energy). With natural gas prices so low in North America, both companies look to have made a mistake. In fact, Shell owns an array of properties that simply aren’t economically worth drilling right now.
Longer term, though, this focus should prove fruitful for both Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A), which both project that natural gas demand will increase materially in the years ahead as it displaces less environmentally friendly coal. With increasing demand is likely to come increasing prices.
Of course, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) isn’t abandoning oil, with large projects coming on line and planned for the future here, too. Across oil and natural gas, the company has about 30 major projects in the works, with an equal number on the drawing board. So the company is clearly spending in an attempt to grow its reserves.
While this won’t help the company in the near term, it provides a silver lining to the reserve cloud that time, and continued investment, will likely heal.
Successful Completion of Big Projects
While tightly correlated with the search for new oil and gas, successfully completing big projects deserves its own review. Essentially, the easy oil and natural gas in the world has been found. Finding new sources of these commodities requires taking on riskier and more expansive projects.