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Shell Offshore Inc. and Shell Gulf of Mexico Inc., the affiliates of Europe’s largest oil company Royal Dutch Shell plc (RDS.A - Analyst Report), have decided to settle matters with the Environmental Protection Agency (EPA) in the U.S.

Per the settlement, both subsidiaries will pay roughly $1.1 million to the EPA for violating the Clean Air Act while conducting drilling operations for two months offshore Alaska last year.  

In Jan 2012, the EPA permitted Royal Dutch Shell to carry on operations, conforming to the Clean Air Act. However, the EPA imposed a strict emission limit. In Jun 2012, following the request of Royal Dutch Shell, the EPA raised the upper level of emission for a short period of time.

Despite the temporary relaxation of the limit, the subsidiaries of Royal Dutch Shell exceeded the maximum limit. Due to the breach, the EPA issued notices to the affiliates in Jan 2013. Afterwards, by Feb 2013, Royal Dutch Shell stopped its Alaska-based drilling activities  

Following the notices and settlement with the EPA, Shell Offshore Inc. is expected to pay a roughly $390,000 penalty for polluting above limits by its Kulluk Drill Barge, while operating at the Beaufort Sea. Shell Gulf of Mexico Inc. will pay $710,000, for its Noble Discoverer drillship for violating pollution restrictions at the Chukchi Sea.

Royal Dutch Shell’s relatively heavy downstream exposure leaves it less diversified than its integrated peers. As such, the group’s results remain greatly exposed to refining/marketing margins.

Royal Dutch Shell currently retains a Zacks Rank #4 (Sell), implying that it is expected to underperform the broader U.S. equity market over the next 1 to 3 months.

Meanwhile one can look at energy firms like Dril-Quip Inc. (DRQ - Analyst Report), Range Resources Corp. (RRC - Analyst Report) and Whiting Petroleum Corp. (WLL - Snapshot Report) that offer value. All the stocks sport a Zacks Rank #1 (Strong Buy).

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