I’ve found during my career as a private investor that opportunities sometimes come along as a result of high levels of uncertainty.
Indeed, although the recent events in Syria are truly awful, such events create a substantial amount of uncertainty among the investment community — especially when they involve the prospect of military action.
Therefore, it has been of little surprise, given recent events, that oil saw its biggest daily rally in over six months, as the prospect of US and Western military action unsettled commodity markets across the world.
ICE October Brent gained 3.3% to a six-month high of $114.35 per barrel, as the market became concerned that the situation in Syria could spill over into Iraq and possibly Iran, impacting oil production in those countries.
Indeed, Iran and Saudi Arabia, two of the largest oil-producing nations in the world, seem to have backed opposing sides in the Syrian conflict. This has added to fears surrounding the potential outcome and its subsequent impact on oil production.
So, with the oil price firming up and looking as though it could yet go higher, I’m thinking of buying some more shares in Shell (LSE: RDSB) (NYSE: RDS.B.US).
One of the main reasons is quite straightforward: a higher oil price is good for Shell. Indeed, for any company that sells a commodity, a higher price is better: it means higher margins and higher profits than a lower price does.
In addition, Shell is remarkably cheap at the moment. It trades on a price-to-earnings (P/E) ratio of just 7.5. This is just over half the P/E of the FTSE 100 and is significantly less than the oil and gas industry group, which has a P/E of 12.5.
Of course, there is little in the way of growth forecast for the next two years, with the market anticipating a decline of 10% in earnings per share this year and a gain of 6% next year. However, a P/E of 7.5 looks ripe for an upwards rerating, even if earnings decline slightly in the coming year or two.
In addition, shares yield an impressive 5.3% and, with inflation still being a headache and bank savings rates still being relatively poor, Shell looks very attractive for income-seeking investors like me.
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> Peter owns shares in Shell.
