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Cash-Rich Royal Dutch Shell Is Spending Wisely

Stocks in this article: RDS.A BP XOM

NEW YORK (TheStreet) -- The return on average capital employed, which measures a company's ability to convert capital into profits, of the oil behemoth Royal Dutch Shell (RDS.A) fell to 6.1% in the first quarter of 2014, down from 13% a year earlier. The company, however, appears to be going on a right track. Shell continues to reward shareholders through dividends and buybacks.

In its previous quarterly results, Shell's reported a rebound of its struggling upstream, or exploration and production, business in the Americas region. Downstream, or refining and distribution, earnings, on the other hand, were negatively influenced by lower refining margins, but even these more than doubled sequentially.

Although Shell has not seen any growth in production, in the previous quarter, the company reported its highest level of cash flows from operations over the last several years, some of which is due to the asset sales. The company intends to sell $15 billion of assets over the next two years.

As a result, despite sluggish growth, Shell continues to reward its shareholders through dividends and buybacks. Meanwhile, the company is spending heavily on its upstream projects but is staying away from risky ventures.

Shell's two American depository receipts, classed as A and B shares, have risen by more than 12% each year to date, currently around $80 and $87 respectively. Due to the Dutch dividend withholding tax rules, the company only repurchases B shares.

The company's net income, in terms of current cost of supplies, dropped to $4.5 billion from $8 billion in the corresponding quarter last year due to the impairment charges of $2.9 billion related to its refineries in Asia and Europe.

Adjusted earnings and revenues, on the other hand, dropped by 3% each from the same quarter last year to $7.3 billion and $109.66 billion respectively.

The company's output fell by 8.7% to 3.25 million barrels of oil equivalents per day. The warm weather in Europe and asset replacements and maintenance cost in Canadian oil sands, Asia Pacific and North America dragged production.

Shell got nearly 78% of its adjusted profits from upstream operations and 21% from downstream.

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