Royal Dutch Shell plc (ADR) (RDS.A), Chevron Corporation (CVX): Is Shell Banking Too Much on Natural Gas?

Exxon Mobil Corporation (NYSE:XOM), however, is siding with Shell in banking on natural gas as the fuel of the future. The energy giant, which became the largest gas producer in the U.S. with its $26 billion acquisition of XTO Energy in 2010, has repeatedly said that it expects natural gas to become a much more important fuel over the next several years. Through its ventures in Qatar and Indonesia, Exxon Mobil Corporation (NYSE:XOM) already commands an extensive global position in LNG with interests in liquefaction capacity of approximately 65 million tons per year and has plans to substantially increase this capacity.

The bottom line
While Shell’s focus on natural gas does leave it vulnerable to a prolonged period of depressed gas prices and diminishes the potential upside from a period of strong oil prices, I think the company’s massive investments in LNG could pay off big time over the long run.

Although LNG projects may not offer potential returns as great as some oil ventures, they are also, as one would expect, less risky. While their upfront capital costs are enormously high, LNG plants tend to require relatively little additional capex once they are up and running.

LNG projects are also characterized by more stable revenue streams since much of their output is sold through longer-term contracts. As such, Shell’s LNG plants should continue to generate dependable operating cash flow for decades into the future – cash flow which can, in turn, be used to fund riskier ventures with greater potential profitability.

The article Is Shell Banking Too Much on Natural Gas? originally appeared on Fool.com and is written by Arjun Sreekumar.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Chevron.

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