There are three quality energy companies I bought in last month’s Investor’s Edge – and one I sold. It wasn’t easy selling Shell (RDS-A). I’ve made big money on it before; indeed, the very first article I wrote for SA was about Shell being defrauded by Russia.  But lately, Shell seems to be doing enough on its own to warrant concern.

Shell’s economic mistakes of paying top dollar for BG, insisting on continuing to pursue the high-cost deepwater drilling in the Arctic, just ended with a more than $2 billion writeoff, and spending $2 billion on heavy oil in Alberta only to shut it down, show a management that has lost its way in search of The Big Score. We aren’t “big score” portfolio managers.  We are slow and steady advisers that like to see incremental gains during bull markets but buy big when we see serious value, typically after a market or individual stock decline. Shell started out just fine but they are no longer thinking protection and steady growth.

With these recent mis-steps and a return on invested capital that has recently declined to 7.3%, I believe that Shell’s marvelous dividend may now be in jeopardy.  We will sell our RDS-B but retain exposure to the oil and gas industry by buying firms that are even cheaper in price per revenues and earnings.  Because (in 2 of the 3 cases) they have a lower profile to most investors, they are actually down a greater percentage than Shell.  All enjoy the same or better credit quality.

Per our last issue, we anchored this trio with Chevron (CVX)  Unlike Shell, Chevron continues to be a company that moves slowly and inexorably toward better returns.  Almost alone among the major international energy firms, CVX did not rush into Iraq, Burma, Russia et al during the boom times for oil and gas.   The company picks its geopolitical partners well (perhaps because it was burned once in Ecuador it is now twice shy.)  Like us, Chevron chooses steady returns over Big Scores (that often aren’t.) This is reflected in its return on capital, which is among the highest in the energy sector.