Royal Dutch Shell Business Quality Report (SHEL) - FREE SAMPLE
NOTE: This business quality report is being provided as a free sample to free subscribers of the type of analysis available exclusively for the paid membership.
Royal Dutch Shell is a diversified energy company with a primary focus on the exploration, production, and refining of oil and natural gas products. This Royal Dutch Shell Business Quality Report explains the Excellent ranking that Shell received under my quality ranking system.
Basic Company Information
Company Name: Royal Dutch Shell
Ticker: RDS.B
Quality Ranking: Excellent (5)
Primary Reason: Anti-Fragility
Size: Mega-Cap
Last Updated: 03/17/2020
Key Points:
There will always be a worldwide growing demand for energy.
Royal Dutch Shell has the scale and resources to acquire their way into any new energy field, whether Solar or Nuclear.
They are vertically integrated allowing them to be a low-cost producer of energy.
Shell is able to become stronger during oil downturns due to weak competition.
Royal Dutch Shell Business Quality Description
Royal Dutch Shell is a vertically integrated oil and gas company that has structured its operations to be a durable provider of energy to the world. Being a vertically integrated oil major means to own the means of oil exploration, drilling, refining, and chemical production, all within a single corporate entity. This is very similar to the business model previously discussed in ExxonMobil’s business quality report. All of the oil majors operate with a similar business model. Their mindset is to grow and acquire oil assets on a multi-decade timeframe which is critical for success within the highly cyclical oil industry.
Royal Dutch Shell’s massive scale allows them to produce oil and gas at a low cost compared to non-oil majors. A low cost then provides Shell the financial flexibility to acquire competitors during the oil market downturns and expand the scope of their own business. When competitors are losing money on every barrel of oil sold, Royal Dutch Shell will still be able to pay a dividend to shareholders.
Culture is the difference between Royal Dutch Shell and other oil majors
I believe ExxonMobil is the best of the oil majors in terms of long-term mindset and culture. However, Royal Dutch Shell is a close second. Both companies have a core focus on investing in their business for long-term shareholders. However, the US-based Exxon and Chevron have a greater focus on sustainable dividends than Royal Dutch Shell. The religious culture around paying a steadily growing dividend makes Shell a slightly inferior choice.
It is hard to overstate the importance of culture when it comes to evaluating the quality of a business. Culture can provide immense benefits to shareholders and a competitive advantage in terms of market power. Royal Dutch Shell has a long-term mindset culture, which grants it the anti-fragile nature needed to attain my Excellent quality rating.
Royal Dutch Shell is an energy company. In addition to producing oil and gas, it is also involved in renewable energy projects.
Why Royal Dutch Shell doesn’t deserve a lower quality rating
The next lowest quality rating is a “high quality” business. The key differentiator between an excellent business and a high-quality business is the presence of a bonus factor such as competitive advantage, non-cyclicality, or anti-fragility.
Royal Dutch Shell offers anti-fragile characteristics. This is very rare for a company operating in a cyclical and commodity-driven business. Normally commodity businesses would be capped at an average rating. Yet, Shell is one of the few companies capable of outperforming that rating.
Shell has proven over the long-term that it is profitable for shareholders to own an oil company as long as that company is vertically integrated, diversified, and massive.
There are many additional reasons to NOT give Royal Dutch Shell an excellent quality rating. These include massive competition, a clear lack of pricing power, and the high capital intensity of the business model. However, these are all overshadowed by the fact that Shell produces a product that has an eternal demand: Energy.
Why Royal Dutch Shell doesn’t deserve a higher quality rating
The next highest rating is a “generational quality” business in my business quality ranking system. The key differentiator between an excellent business and a generational business is the long-term durability of cash flows.
It was difficult to determine where to rank Royal Dutch Shell. I gave its competitor ExxonMobil, the generational quality ranking because of the infinite durability of demand for energy. However, I believe ExxonMobil has the best culture of all of the oil majors. Thus, I ranked Shell one step lower in terms of quality because the culture is critical for an oil company to overcome the deficiencies of its cyclical and commodity-driven business.
Royal Dutch Shell is my second favorite oil major. Therefore, despite also being a business focused on meeting the world’s energy demands, it is ranked only as an excellent business.
References:
Joshua Kennon’s discussion of Investing in Oil Stocks
Episode 12 of the DIY Investing Podcast: Investing in the Oil Majors
Call to Action: Sign-up for my paid stock research
NOTE: This business quality report is being provided as a free sample to free subscribers of the type of analysis available exclusively for the paid membership.
Investing Disclaimer
All investments involve risks and any investment can result in a complete loss of capital. ALWAYS do your own research prior to purchasing an investment. I am NOT a financial advisor. I am NOT a registered investment advisor and I do NOT provide investment advice. None of the rewards, research, or other benefits from being a member/patron of DIY Investing’s membership site should be construed as investment advice. I have NOT taken into account your personal financial situation in developing this content. I shall NOT be held liable for any errors or omissions in the content provided on this website. All content is provided for informational and educational purposes only. I, Trey Henninger, and DIYInvesting.org shall NOT be held liable for any investment decisions made from the use of the content provided via the DIYInvesting.org website. Read my full Terms of Service for additional information.