Will Royal Dutch Shell plc survive the oil crisis?

Should you avoid Royal Dutch Shell plc (LON: RDSB) until the oil crisis is over?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the price of oil having risen from $28 per barrel earlier this year to around $50 per barrel, many investors may feel as though the worst is now over. Certainly, such a rapid gain in the price of any asset indicates a step change in investor sentiment and looking ahead, the price of oil could rise yet further. However, with there being a major imbalance between the supply of and demand for oil, its price could easily come under further pressure in the short-to-medium term.

In such a situation, it may be prudent for investors to hold shares in oil stocks with sound financial backgrounds. One such company is Shell (LSE: RDSB), with it having a strong balance sheet and excellent cash flow. In fact, evidence of Shell’s financial strength can be seen in its acquisition of BG Group during the oil crisis. This indicates that Shell is very confident in its ability to survive a low-oil-price environment. And with it having a debt-to-equity ratio of just 41% even after the acquisition of BG, it seems capable of making further acquisitions in future.

Long-term view

Clearly, such a strategy is relatively risky. The price of oil could fall further and cause high quality assets to trade at even more appealing prices. However, Shell seems to be taking a long-term view on the price of oil, with it having the potential to rise due to increasing demand from the emerging world in future years. And with Shell cutting back on exploration and investment spending, it seems to be conserving cash where possible to ensure its survival even if the oil price undergoes a renewed fall in the coming months and years.

Of course, Shell remains a relatively volatile stock to own. Its profitability is highly dependent on the price of oil and so its share price could continue to trade within a wide range. However, this risk appears to be adequately priced-in to the company’s current valuation. For example, Shell trades on a forward price-to-earnings (P/E) ratio of just 12.8 and this indicates that it offers a wide margin of safety for long-term investors. And with Shell having a yield of 7.5%, which is due to be covered fully by earnings next year, it remains a sound income play too.

Coping with volatility

In terms of survival during the current oil crisis, Shell’s diversity, balance sheet strength and impressive cash flow mean that it’s likely to outlast the vast majority of its sector peers. This means that in the long run its position relative to industry rivals could improve, since Shell may be able to increase its market share and improve on its profitability. As such, while survival may be key for now, in the long term Shell seems to offer high potential returns for investors who can live with above average volatility.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »