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Analyst Blog

On Jan 15, 2014, Zacks Investment Research downgraded Europe’s oil giant Royal Dutch Shell plc (RDS.A - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The leading integrated energy company has experienced a disappointing earnings phase. It has missed the Zacks Consensus Estimate in the last two quarters and the future looks bleak as well. The Zacks Consensus Estimate for the fourth quarter of 2013 has gone down by 1.7% to $1.77 per share in the last 30 days. Moreover, for the full year, estimates have gone down by 6 cents and are currently pegged at $7.03 per share in the same time frame.

Shell has a high capital spending habit that gathers negative sentiment. The company expects full-year 2013 capital expenditure to exceed previous estimates by $5 billion, and touch a record level of $45 billion. This over spending could hamper investor interest as it significantly restricts cash flows.

The company intends to pickup divestitures this year under the guidance of its new chief executive, Ben van Beurden. Though this may bring the much needed cash to meet company and investor interests, it could hamper productivity.

Shell is the most gas-focused among the major companies in the sector, with more than half of its current production from the commodity. Given natural gas’ volatile fundamentals, this remains a key area of concern, in our view.  

Also, from the industry rank perspective, Shell does not look too good as well. It has a Zacks industry rank of 210 out of 265 industries. Being part of a weak industry could dampen the prospects of a company on a macro level.

Other Stocks to Consider

All industry players are not doing as badly as Royal Dutch Shell. One can consider better-ranked stocks like Pembina Pipeline Corporation (PBA - Snapshot Report), Seadrill Partners LLC (SDLP - Snapshot Report) and Clayton Williams Energy, Inc. (CWEI - Snapshot Report). All these stocks currently sport a Zacks Rank #1 (Strong Buy).
 

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