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Is Royal Dutch Shell plc Set For Electrifying Earnings Growth In 2014?

Today I am spelling out why I believe Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) could prove to be a winner for risk-tolerant investors in 2014.

Earnings snapback expected but risks remain

Shell’s has embarked on a series of production start-ups in recent months, on land and at sea, in its bid to drive earnings and cash flow from 2014 onwards. And in its bid to build an efficient, earnings-building machine, the firm has promised to rein in capital expenditure from next year by optimising its core assets and spinning off or discontinuing other non-essential projects.

Indeed, Shell announced just this week that it was indefinitely shelving plans to move forward with its 140,000 barrels per day gas-to-liquids (GTL) asset in the Gulf of Mexico, an enterprise which would have cost in the region of $20bn. The company cited “the likely development cost of such a project, uncertainties on long-term oil and gas prices and differentials, and Shell’s strict capital discipline” as factors behind the decision.

Still, the statement underlined a critical worry hanging over the entire fossil fuel sector looking ahead: that is, the outlook for oil and has prices next year and beyond, particularly as enduring twitchiness over the state of the global economy — as well as fears over the timing of Federal Reserve monetary tapering — could keep commodity prices underwater. On top of this, poor refining margins and rising exploration costs also look likely to continue as we enter 2014.

Elsewhere, Shell’s long-standing operational problems in Nigeria look set to weigh heavily on earnings once again in the new year, and the business could endure difficulties locating possible buyers for its assets as wide-scale oil theft in the country intensifies.

Shell is anticipated to punch its second consecutive year of earnings shrinkage in 2013, following up last year’s 6% decline with a 17% drop this year, to 219p per share. But City brokers expect earnings to rebound strongly in 2014, with an 11% increase predicted to 242.3p per share.

This leaves the energy giant dealing on a P/E rating of 8.7 for 2014, below the value threshold of 10, while a price to earnings to growth (PEG) readout of 0.8 is also within bargain territory under 1. Still, Shell has a number of lingering road blocks to growth, an unsavoury situation for low-risk investors which could lead to heavy earnings downgrades.

Dividend income ready to rocket

Still, Shell may be an extremely appealing stock pick for those seeking punchy dividend growth. The oil producer is expected to hike last year’s 172 US cent payout to 184 cents in 2013 and 189 cents in 2014, prospective payments which carry weighty yields of 5.2% and 5.4% respectively.

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> Royston does not own shares in Royal Dutch Shell.