The oil price is on the slide. If you had nipped to the shops for a barrel of Brent crude in early June you would have paid $115 — today you can take one home for less than $102.
That’s a drop of nearly 12% in less than three months. Over the same period, shares in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) have also fallen, but only by 3%.
As a vertically integrated oil major, Shell has a high degree of in-built immunity to oil price swings. The price may have further to fall, but Shell should remain a surefire investment.
Supply Surprise
Naturally, it isn’t completely immune to an oil price slump. If the price falls, so do Shell’s revenues, with no corresponding dip in its exploration and production costs.
This will worry some investors, given that many analysts expect the oil price to fall further, despite continuing uproar in the Middle East, and the West’s stand-off with oil and gas giant Russia.
These concerns have been more than offset by rising supply and falling demand.
The US is now producing more oil than for 30 years, and the International Energy Agency has recently cut its forecast for global oil demand, as Chinese and Russian growth weakens.
A falling oil price would be good for the economy generally (hooray!), but Shell can shrug it off.
Life’s A Gas
One reason is that Shell has diversified strongly into liquid natural gas (LNG).
True, that is a mixed blessing right now, with the LNG price also falling in recent months. But this still gives Shell attractive diversification going forward, especially given the growing challenges oil majors face in accessing oil deposits in increasingly inaccessible climes (politically and geologically).
Van’s The Man
Shell has also raised $8bn from offloading assets so far in 2014. This should make it stronger and more competitive, offsetting revenue lost from falling energy prices.
It should also protect margins and ensure that projects pay, even if prices continue to fall.
Incoming chief executive Ben van Beurden set out his stall at the start of the year, promising to improve financial results and make capital work harder, and has made good progress so far.
Having just posted a 33% leap in Q2 earnings to $6.1bn, Shell is in a good financial state right now.
And it is throwing off cash, with the $11bn cash flow from operating activities up from $8.4bn one year earlier, excluding working capital movements.
That allowed it to distribute $3bn in dividends in the quarter, up 4% year-on-year, and should fund its plans to spend $7 to $8 billion on share buybacks in 2014 and 2015.
Shell’s commitment to its shareholders is admirable.
Energy Efficient
With forecast earning per share growth of 43% this year, Shell is cruising along nicely. Its current 4.3% dividend yield is neatly above the FTSE 100 average of 3.5%.
The share price may be up 18% in the past 12 months, but trading at a forecast 10.9 times earnings for December, its valuation doesn’t look too pricey.
There is no doubt that falling oil and gas prices will hurt, but they’re certainly not lethal to the long-term investment case.
All this assumes the oil price will continue to fall, but investors should assume nothing. There are plenty of potential shocks out there. Either way, Shell will survive.
