First things first: Shell (LSE: RDSB) (NYSE: RDS-B.US) is not in the same boat as BP (LSE: BP) (NYSE: BP.US) found itself in following the horrific Deepwater Horizon oil spill in 2010.
Indeed, although the oil spills involving Shell in Nigeria in 2008 are also tragic, they are highly unlikely to lead to anywhere near the scale of financial penalty as was dished out to BP by the US government.
So, Shell is unlikely to have to reduce its asset base (as BP has been required to do over the last few years) in order to afford the potential compensation payment. Of course, from a purely investment standpoint, Shell remains one of my favourite stocks for three key reasons.
Firstly, it is dirt cheap. Although shares have underperformed the index mainly as a result of the oil and gas industry group having a challenging period, Shell remains cheap even when compared to its industry group (which is a very cheap industry group).
Indeed, Shell currently trades on a price-to-earnings ratio of just 8, which compares favourably to the oil and gas industry group on 12.4 and to BP, which has a P/E of 11.7.
Meanwhile, shares appear to offer excellent value when compared to the FTSE 100. They trade on a P/E of 15, meaning investors in Shell are buying just over half as many years earnings as they would if they were to buy shares in an ‘average’ FTSE 100 company.
Secondly, Shell offers a great dividend yield. It currently pays out just 40% of earnings as a dividend, meaning that there is scope to increase this figure to more like two-thirds, while still investing enough cash in the business.
Shares currently yield 5%, easily beating BP’s yield of 4.8% as well as inflation and the best savings rates available at high-street banks.
Thirdly, Shell is a hugely diversified oil major. Unlike the smaller, exploratory companies such as Premier Oil and Tullow Oil, it is spread across the globe with a large number of projects and assets. Therefore, the failure of one or more prospects, although disappointing, may have less of an impact on the company-wide performance than at a smaller, more focused company. Furthermore, Shell is not, unlike BP, in the process of reducing its asset base to make large compensation payments.
So, a great yield, very cheap valuation and the diversification of a quality asset base mean that I’m bullish on Shell.
