Is Royal Dutch Shell’s ‘problem child’ business growing up?

Hundreds of activists in kayaks took to Seattle bay over the weekend to protest plans by Royal Dutch Shell to resume oil exploration in the U.S. Arctic. But for analysts and investors, the news means that Shell's "problem child" is starting to get some attention.

Environmentalists criticize Shell's offshore exploration plans as endangering a region important in regulating the global climate. However, from an investor perspective, resuming drilling in the Arctic could be part of "underappreciated" restructuring efforts to Shell's loss-making North America upstream business that make its stock a "buy."


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"We believe Shell's Upstream restructuring efforts were underappreciated by the market," said Bernstein analysts Oswald Clint and Teng Ben in a research note on Monday.

Shell's North America upstream business—the part that deals with locating and drilling for oil and gas—has been a "problem child," in the words of Clint and Ben.

However, the analysts said that the $13.4 billion of divestments undertaken in 2014—the highest amount in a decade—including to its unprofitable U.S. unconventional (petroleum extracted using techniques other than conventional oil wells) portfolio, could reap returns as soon as 2016.

"The underlying unconventional portfolio in North America, in our view, is considerably better than before. Shell's U.S. portfolio will also benefit from increasing oil-weight and deepwater, as major Gulf of Mexico projects ramp up," Clint and Ben said.

Shell's North America upstream unit moved to profit in 2014 following restructuring, but returned to losses in the last three months of the year, as oil prices slumped.

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Bernstein forecast that the unit could return to profit as soon a 2016 and grow to around $17/boe (barrels of oil equivalent per day) by 2020, in its most bullish scenario.

However, the analysts said it would be "difficult to see this business break even," if oil prices remained at current levels.

Shell's London-listed shares closed at around £19.81 on Monday on the London Stock Exchange, down 0.5 percent on the day and 15.5 percent on the last 12 months.

Bernstein said Shell was one of its favorite names out of oil majors, alongside Eni and Statoil. It rated Shell "outperform," with a target price of £23.50/$72.40.

Nomura reiterated its "buy" stance on Monday, with Investec and Liberum Capital rating the stock "hold," according to Hargreaves Lansdown.