Royal Dutch Shell plc RDS.A has decided to proceed with the Gulf of Mexico (GoM) based Appomattox deepwater project although the business scenario looks challenging with crude prices still at low levels. Per the company, the development will likely be operational by the end of this decade.
The project includes the installation and construction of a floating platform in the GoM. Initially, the platform will produce oil and gas from the Appomattox and Vicksburg fields. Shell estimates peak per day production capacity from the project at roughly 175,000 barrels of oil equivalent (BOE), not too far from the company’s total 2014 GoM daily output of 225,000 BOE. Investors should note that this development is the eight and the largest deepwater platform by the company in the GoM.
It is highly possible that Shell’s decision to invest in upstream activities amid unfavorable oil prices raises questions among shareholders. But there is almost nothing to worry about as the integrated energy major’s estimated cost of producing oil from the development is $55 per barrel. This is less than the price of crude, which is now trading near $60 per barrel.
The company added that its improved design techniques, savings in the supply chain and a lesser number of required wells for upstream operations have helped it in reducing the project cost by 20%.
Shell is one of the largest integrated energy firms in the world with a strong and diversified portfolio of development projects that offer attractive long-term opportunities.
However, the oil price slump has affected the company’s earnings and cash flows, in particular in its upstream unit.
As a result, Shell currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, some better-ranked players in the energy sector are Pembina Pipeline Corporation PBA, EQT Midstream Partners LP EQM and Tallgrass Energy Partners LP TEP. All the stocks sport a Zacks Rank #1 (Strong Buy).
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