INVESTMENT THESIS
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Shell faces a major credibility problem: Management and the board let the problems in its portfolio--huge bets on shale despite this being far from a core competence, cost overruns on key projects (the Motiva refinery, for example), and a chronically poor-performing downstream--fester for so long that the market has lost faith in the companys execution. Shells management and board have been painfully slow in addressing the weaknesses. Even though some actions are now being taken--a new CEO has been brought in, shale investment is being cut and acreage sold off, a few refineries will be sold, and so on--its nonetheless concerning how long it took for these decisions to be made. We cant help but think the better-run large-cap oil firms would have recognized and addressed such operational weaknesses far more quickly.

Given all of the operational issues of late, should Shell make some bold strokes that truly improve results, its stock could easily outperform its peer group in the coming years. Surely thats what the board is hoping new CEO Ben van Beurden is capable of achieving. But the task he faces is daunting: $30 billion spent buying acreage in more than a dozen shale plays has only led to two positions that hold much value (the Permian and Duvernay). This $30 billion of shale capital expenditures has not generated a plethora of growth options for Shell. Instead, Shell will have to largely look elsewhere in the coming years for value-creating upstream growth. Further, Shells refining footprint is very poorly positioned, largely located in markets (Europe) with structural problems that make generating decent returns an extremely daunting task.

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