Shell’s (LSE: RDSB) (NYSE: RDS.B.US) recent half-year results were disappointing.
In fact, many investors felt they were very poor, with the inclusion of a $2.2bn net charge that was made up mainly of impairments to US shale assets doing little to improve market sentiment.
Furthermore, current cost of supply (CCS) earnings were $4.6bn in Q2, a 21% decrease versus the same period in 2012. In addition, oil theft and disruptions to gas supplies continue to cause problems in Nigeria, with the company estimating that such issues cost the Nigerian government up to $12bn in lost revenues per annum. Clearly, this is a major problem.
However, despite the fall in profitability and the vast write down in its asset base, I’m still bullish on Shell for the following three reasons.
Firstly, Shell is in the midst of significant change. It is investing in new capacity worldwide, has recently launched strategic portfolio reviews in Nigeria onshore and North America resources plays, as well as completing around $21bn of divestments in the last three years.
The results from such changes inevitably take time to come to fruition, with the interim transitionary period unlikely to be a hugely successful one. However, I believe that Shell is making the right decisions to generate sustainable, long-term profitability for shareholders.
Secondly, Shell currently offers a yield of 5.1%, thereby providing a return above and beyond inflation and which is also far better than bank savings rates. Furthermore, the payout ratio is just 40%, meaning that dividends per share could be increased significantly, with the company still leaving itself a relatively large amount of headroom when making dividend payments.
Thirdly, Shell currently trades on a price to earnings (P/E) ratio of just 8, which is a substantial discount to the FTSE 100 and to the wider oil & gas industry group. Their P/E ratios are 14.9 and 12.1 respectively, highlighting just how much relative value Shell currently offers.
So, I’m bullish on Shell’s turnaround story and patient enough to give the company the time it needs to make the necessary changes in order to deliver long-term and sustainable profit growth. I’m also keen on the 5.1% yield and the discount on which shares currently trade when compared to the industry group and to the FTSE 100.
