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Sometimes, the biggest winner in a casino is the person who doesn’t play at all. But Royal Dutch Shell (NYSE: RDS-A) is in the gambling mood nonetheless.
Last month, the company began drilling in the Chukchi Sea off the coast of Alaska. No one knows just how that effort will go. But everyone is holding their breath.
The reserves in the Arctic may be the last truly untapped rivers of oil left in the world. (Though probably nothing like the 2.6 trillion barrel bonanza right here in America.)
But there’s a reason it hasn’t been tapped yet. And it’s not just because of the environmental fights surrounding Arctic drilling.
The Arctic Challenge
You’ll recall the chant during just about every McCain-Palin election stump speech in 2008: “Drill, baby, drill!” Well, it’s not that oil companies haven’t tried.
Many plans came and went, including those from ConocoPhillips (NYSE: COP), Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) and even BP PLC (NYSE: BP). Despite great advances in drilling techniques, no one has had any success.
Now, with Shell finally going forward with its own drilling plan – its second, in truth – even its competitors are shaking their heads.
Patrick Pouyanné, the CEO of Total SA (NYSE: TOT), a giant Paris-based oil company with tons of offshore drilling experience, said: “At $50 a barrel, it does not make any sense.”
Rome-based Eni SpA’s (NYSE: E) CEO Claudio Descalzi told reporters that drilling in the Arctic is just “too complicated … too expensive and too risky.” Eni itself was once interested in the prospect and gave up that plan.
But the real danger to Shell with this plan to go where others fear to tread is that the company has already proven it couldn’t do it right.
Doubling Down
Back in 2012, Shell spent billions drilling two small unsuccessful wells in the Arctic. Worse than not finding the ocean of oil it expected was what happened next. Its enormous Kulluk rig ran aground, costing the company billions.
On top of those problems, it also came to light that Shell was playing a very dangerous game with its own equipment. One operator pleaded guilty to eight felony offenses for not reporting large safety issues during that arctic effort.
So, Shell is throwing caution to the wind again it seems. We can only guess how this will all turn out. But it could take another decade before any oil will actually begin to flow, even if Shell wins its bet.
Of course, all of this comes at an even more confusing time for the multinational oil giant. It is currently in the process of the largest acquisition in a decade.
Earlier this year, Shell announced plans to buy BG Group (OTC: BTGYY) for $70 billion. BG is a U.K.-based natural gas producer with operations all over the world. Considering the big picture of how much cleaner and in demand natural gas is expected to become over the next few decades, this deal should be a huge boon for Shell.
The problem, however, lies in the fact that Shell might be destroying its own operations prior to this deal going through. Already, the two companies have been waiting for months for regulatory and antitrust approvals in several countries. The U.S. and Brazil have given them the green light to merge. But this process takes time. Meanwhile, Shell is playing a risky game north of Alaska.
Often the best bets in the market are made on stocks and sectors that are beaten down. And, in truth, now might be just such a time to get into oil and gas in a big way. But there are definitely better ways to play this sector than with a bet on Shell.
In fact, smart investors can take a lesson from Shell: Stay away from the oil giants taking gambles during this period of low oil prices.
Instead, the best move you can make is to find attractively priced oil companies that have solid balance sheets. We already know that Exxon Mobil, ConocoPhillips and Chevron all have strong stomachs when it comes to buying up cheap assets when oil prices fall.
Even though the energy sector seems like a gamble these days, it still pays to stay out of the casino.