On Thursday I highlighted an oil & gas company that I think is too risky for novice investors, but does that mean I place the whole industry off-limits? No, certainly not, and today I’m going to tell you why I think Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is one worth tucking away for a few decades.
Instead of being focused on the exploration part of the industry, 90% of Shell’s business is downstream — so the demand for oil and gas is guaranteed to provide handsome revenues for Shell for years to come, without all the risk.
Disaster!
That doesn’t guarantee immunity from disaster, of course, as we saw only too painfully with BP and the Gulf of Mexico oil spill. But despite the scale of it, BP survived with actually not that much long-term damage. The share price is down from its pre-disaster peak, but dividends are still motoring along with a well-covered yield of over 5%, forecasts suggest a 30% recovery in earnings per share this year, with another 16% growth next year.
Imagine the same kind of disaster happening to an exploration-only company, at their only, or major, site — they’d be toast.
And every safety feature that BP has, Shell has too, only more so.
As safe as they come
With a market capitalisation of £134bn, Royal Dutch Shell is the biggest quoted company on the FTSE, 60% bigger than BP in fourth place. It also has higher turnover and makes around 50% more profit than BP, and it actually has lower debt — so it’s in an even better financial state to absorb big shocks.
Shell is also less focused on exploration than BP, with only about 9% of its turnover coming from upstream business compared to around 17% for BP. Sure, there are bigger profit margins upstream, but only if the risks don’t get you.
Global reach counts, too, and Shell is very well diversified geographically — 20% of its turnover comes from the US, with around 40% from Europe, and the remaining 40% spread pretty widely. (BP is more tied to the US, doing 35% of its business there, and is more exposed when US governments feel the need to kick some foreign bottom).
Compare that to the oil explorers, who are typically focused on one geographical area. Some go for Africa, some the North Sea, some the Falklands, and so on — and as we saw, Gulf Keystone is wholly in Kurdistan.
Investment performance
Admittedly, the Shell share price hasn’t done well of late, with the price down a few percent over the past 12 months while the FTSE has gained more than 15%. But it’s modestly up over the past five years, and dividends yielding around 4.5% to 6% have been rolling in — shareholders got 4.9% last year and look to be on for around 5.5% this year.
Current valuation is not a key part of this series, as I’m really looking at the bigger and longer-term picture, but Shell shares are trading on a forward P/E of only around 8.5 right now, and to me that looks like a steal.
So, Shell — it gets you a slice of the oil & gas business, but has the size, the cash, the market focus, and the geographical spread to keep risks down about as low as is practical. And demand for its products is not going to stop any time soon.
