Barely more than two months after U.S. forces captured former Venezuelan President Nicolas Maduro, that petroleum-rich country is already making moves to boost its oil output. That’s a surprisingly quick pace, particularly given that the long-term fate of the current government is far from settled.
Integrated oil giants Chevron and Shell (SHEL 0.02%) reportedly notched oil and gas exploration and production deals with the South American nation, which is a member of the Organization of Petroleum Exporting Countries (OPEC). Historically, those headlines aren’t surprising, since those two companies maintained a presence in Venezuela while rivals bailed after the country nationalized its energy industry.
It could take a while for Venezuela to produce tangible benefits for Shell investors. Image source: Getty Images.
Specific to Shell, it’s believed that the company’s Venezuela agreement paves the way for it to expand offshore natural gas exploration and onshore oil and gas drilling. Over the long haul, an increased Venezuelan footprint could benefit Shell investors for a simple reason: The country has the world’s largest provable crude reserves.
How meaningful the Latin American nation is to the stock price in the near term, well, that’s a different ballgame. Let’s take a closer look.
A case of good timing
As of March 19, Shell’s shares are up 24% year to date and 14% over the past month. Focusing on the monthly run, that period includes the recent Venezuela headlines. More importantly, it includes the conflict in Iran, which is driving oil prices higher.
Here’s where things get interesting for Shell investors. There’s a compelling link between Iran and Venezuela. Conflict in the Middle East forced the closure of the Strait of Hormuz. That’s a big deal because 20% of the world’s oil and liquefied natural gas (LNG) is shipped through the strait.
Regarding LNG, Shell is uber-bullish on that commodity. In a March 16 LNG-dedicated update, the company said, “LNG is the fastest-growing energy source after non-hydro renewables,” and added that it expects global LNG demand to increase by at least 45% from 2025 through 2050.
Today’s Change
(-0.02%) $-0.02
Current Price
$90.42
Key Data Points
Market Cap
$255B
Day’s Range
$88.33 – $90.42
52wk Range
$58.55 – $92.95
Volume
174K
Avg Vol
6.4M
Gross Margin
16.66%
Dividend Yield
3.20%
Obviously, Shell or any LNG-producing company needs to be able to get the product to market to generate revenue and profits. As the current state of affairs in the Strait of Hormuz confirms, that’s not always a foregone conclusion. No, Venezuela isn’t immediately replacing lost Middle East oil and gas supply. Still, with increased exposure to the South American country, Shell is enhancing its geographic diversification and bolstering its long-term supply streams.
Shell’s Venezuela payout will take time
Bottom line for Shell in Venezuela: Increased output there could spark the stock, but that positivity is likely to be felt over years, not weeks or months. That’s because there are moving parts, which is always the case in developing-world oil markets.
Venezuela needs to solidify its government and prove to oil companies (and the world) it’s a dependable partner, not an adversary. Speaking of partnership, one is likely needed with neighboring Trinidad and Tobago to effectively offshore gas onshore.
If those issues are ironed out, Venezuela could be additive to the Shell bull case. As just one example, the Dragon field, which the company has an agreement to explore, could generate $500 million in yearly revenue when it ramps up. That’s an alluring prospect, but investors hoping for a winning bet on Shell and Venezuela need patience and perspective.