As the old saying goes, ‘you have to spend money to make money’.
The adage is especially true in the oil industry, where exploration costs can be substantial but can yield significant rewards. Of course, the flip-side is that exploration costs can be substantial and yield no reward!
Indeed, that flip-side sort of set the tone in recent results released by a number of major oil companies. They had all experienced spiralling costs… and disappointing exploration results.
One of the companies was Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), a company I remain very keen on despite its recent results being slightly worse than the market had anticipated.
Indeed, costs were up and returns were down despite the price of oil averaging more than $100 per barrel over the period.
It is of little surprise, then, that many investors are ditching oil majors such as Shell in favour of smaller, apparently more nimble rivals. Some investors even reckon Shell and its peers are dinosaurs that are not worth investing in.
However, I think that a difficult period for Shell is very much reflected in its current share price. Certainly, the company is not performing quite as well as one would hope but the share price seems to have fully priced-in this view.
Indeed, Shell trades on a price to earnings (P/E) ratio of just 8.6. This is very low on a standalone basis but looks even cheaper when compared to the FTSE 100 on 15.2 and the wider oil and gas sector on 12.6.
Furthermore, investors in Shell may be content for little in the way of earnings per share growth over the next couple of years, safe in the knowledge that inflation is not eating away at their investment, with Shell yielding an impressive 5%.
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> Peter owns shares in Royal Dutch Shell.