Spotlight: Royal Dutch Shell

With all the turmoil in the oil market you might start wondering what the outlook is for oil-related companies. Today we will take a look at one of the biggest oil companies in the world: Shell (AMS:RDSA). First of all, it is worth noting that the Shell stock is fairly stable, making it an interesting stock for the more risk-averse investors. Especially since this enables Shell to pay-out regular substantial dividends which often amount 4% to 5%. But what are the consequences of the low oil price for Shell in the future? There are 2 sides to this story. You should be aware that companies like Shell have two main business segments. The first is drilling up oil and selling this oil (upstream). The second is to refine oil into gasoline or comparable products (downstream). The lower oil price will harm the upstream profits, because the margin on oil is simply lower. However, this threat is countered by the downstream profits. Gasoline tends to have a smaller reaction in market prices than crude oil. Since the costs of goods sold (in this case crude oil) is low and the gasoline prices stays relatively high, the margin in the downstream segment remains relatively high. Because Shell is a major player on both the downstream and the upstream segment, it is able to diversify the risk of low oil prices away up to a certain level. If we then take a look at the current cost situation of Shell we note that Shell is currently busy restructuring the company, causing costs to fall substantially. This is also reflected in the third quarterly profits of Shell which showed an amazing 31% increase in profits. Considering that Shell is able to counter the oil price threat, Shell's stable dividend payments and Shell's structural lower costs, we think Shell is a solid investment.