Since the beginning of 2011, Royal Dutch Shell‘s (LSE: RDSB) (NYSE: RDS-B.US) shares have underperformed the wider FTSE 100 by around 9%.
This stagnation has left many investors asking the question, ‘will Shell ever break higher?’
Indeed, as the third largest oil company in the world, with enough oil reserves to last for more than 20 years at current production rates and a dividend history that stretches back to the Second World War, Shell should trade at a premium valuation to both its peers and the wider market.
Nonetheless, Shell currently trades at a discount to its peers. The oil giant currently trades at a historic price-to-earnings (P/E) ratio of 7.7, while its peers within the oil & gas producers sector trade at an average historic P/E of 12.4.
Outlook
Having said all of that, Shell’s recent underperformance can be attributed to its first-half results that came in below expectations.
The company also announced that it was scrapping a long-standing plan to increase oil production to four million barrels per day by 2018, a 29% increase from current levels.
Still, despite these poor results Shell’s development pipeline looks strong. The firm has five major production projects slated to come online over the next 18 months, which management predict should add $4bn to to the company’s cash flow by 2015.
In addition, Shell’s management is proactive in “rigorous portfolio management… to refresh the portfolio for growth”. Indeed, over the past three years, the company has sold-off $21bn of assets, while at the same time income has expanded 70%.
Valuation
Despite managements positive tone about Shell’s future, many City analysts remain skeptical and predict that earnings per share will fall 1-2% over the next two years.
So, one of the reasons behind Shell’s low valuation and poor performance could be attributed to this dismal City outlook.
Having said that, on a price-to-book valuation, Shell is trading at a ratio lower than any point seen during the last decade. Moreover, some analysts have even suggested that Shell could be trading at one of the lowest price-to-book valuations in the last 50 years.
In particular, Shell is currently trading at a price-to-book ratio of 1.1, compared to its 10-year average of 1.7. This valuation is also lower than that of both of its larger peers, Exxon Mobil and Chevron, which trade at an average price-to-book ratio of 2.
Foolish summary
With Shell currently trading at such a low valuation, the company looks highly appealing. In addition, managements drive to sell off non-core assets and boost production over the next few years should only improve the company’s outlook. So overall, I believe that Royal Dutch Shell could be in line for a move higher in the near future.
