Although some investors are negative on oil and gas majors like Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), pointing out that we are meant to be weaning ourselves off polluting fossil fuels, I don’t agree.
Given that marginal declines in consumption in mature western markets will easily be offset by growing demand for oil and gas in emerging markets like China, Africa and India, I don’t expect falling demand for Shell’s products to be a problem in my lifetime.
To be honest, I believe that Shell is currently a strong buy, despite the risks attached to its dependency on oil and gas extraction.
Strong fundamentals
In the long run, buying shares when they’re cheap is the most reliable way to beat the market. For me, Shell’s current valuation ticks all the boxes, and the firm’s shares look very attractive at the moment.
Shell stock currently trades on a trailing P/E of 9, with a trailing dividend yield of 5.2%. Looking ahead, Shell’s dividend is expected to rise by 8% this year, giving a prospective yield of 5.5%.
Shell’s net cash from operating activities is sufficient to cover its capital expenditure and dividend commitments, and the firm’s debt levels are low — Shell’s net gearing is currently just 11%, and its net debt is less than last year’s post -tax profits.
Overall, it’s a very attractive package.
What about oil prices?
One problem that could affect Shell would be a sustained period of low oil prices. However, Shell says that its tests long-term projects against oil prices of $70-110 per barrel, suggesting that it would be able to weather a short-term collapse in oil prices without much problem, as it did in 2009.
It’s also worth remembering that nearly half of Shell’s profits now come from gas and LNG. Shell is a global leader in this industry and demand for gas is growing much faster than for oil, giving it strong long-term prospects.
A new focus
Shell’s outgoing CEO, Peter Voser, has said that the firm will start to focus on improving cash flow and earnings, rather than maximising new production at all costs.
This is a similar story to that being told by the big mining companies, and in my view, it could lead to substantial gains for Shell shares over the next few years, as the benefits of this policy filter through to shareholders.
A share to retire on?
Shell currently offers a 5.2% yield, making it a strong favourite with retirement investors.
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> Roland owns shares in Royal Dutch Shell.
