Shell (LSE: RDSB) (NYSE: RDS-B.US) is out of favour with investors. Its shares are down 5% over the year, against an 8% rise in the FTSE 100. Much of that is down to poor results, including a $2.1bn write-down that helped push half-year profits down from £16bn to £12bn.
The cause of that write-down? Shell's $24bn investment in shale oil and gas in the US was ill-timed. It acquired assets just before the glut caused US gas prices to plummet. In an interview with the Financial Times to mark his forthcoming departure, Peter Voser described the outcome of Shell's bet on US shale as one of the biggest regrets of his time as CEO.
He explained that, with prices depressed, Shell slowed the development of its shale resources and so bore $3bn of depreciation without any corresponding revenues. US shale is "an emerging strategic business" that needs fixing over the next two to four years.
Therein lies the upside. One of the biggest challenges facing major oil companies is how to replenish reserves. Though it's planning to sell some, much of its shale resources in North America will be exploited, and profitably, in the future.
President Barack Obama is shifting policy towards allowing more exports from the US, suggesting that the country could be a net exporter of gas by 2020. With US gas prices a third of the price of liquefied natural gas imports in Europe, there will be substantial arbitrage potential.
10 years vs one quarter
Shell has also come in for criticism from the City for its capital expenditure programme. Goldman Sachs pointed out that Total's share price rose 15% after it announced a reduction in capital spending. Mr Voser gave that suggestion short shrift, saying it was the board's job to take a 10-year view. Current capex generates future profits.
If you track Shell's quarterly results as City analysts do, or are measured on short-term performance as fund managers often are, then the shale gas business and capital spending may be negatives. But if you are investing for the long term, they become positives. One of the private investor's advantages is to be able to take a long view without being second-guessed.
So the City's disenchantment with Shell is a buying opportunity for investors like me - and maybe you, too. The prospective P/E of 9 and yield of 5.5% is a great entry point.
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