Is this 50p oil stock now a better buy than Royal Dutch Shell plc?

Could this under-the-radar 50p stock outperform Royal Dutch Shell plc (LON:RDSB)?

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It’s been a roller coaster few years for investors in the oil & gas sector. The collapse of the oil price from over $100 a barrel to a nadir of sub-$25 in early 2016 has been followed by a recovery to over $50 today.

Investors who followed Warren Buffett’s mantra to be “greedy when others are fearful” have seen some spectacular gains. Even FTSE 100 heavyweight Shell (LSE: RDSB) has shown an impressive turn of foot in emerging from the valley of the shadow of death.

Is Shell still good value and set to continue its advance? And whatever the answer to that question, could an under-the-radar 50p stock outperform its blue-chip peer?

Brilliant opportunity

Shell’s shares hit a low of 1,278p on 20 January 2016. Anyone buying at that price is sitting on a gain of 84%, with the shares trading at 2,355p as I’m writing. They’ll also have received over 250p in dividends, representing a yield of 19.6% in less than two years. You didn’t even need to buy at the bottom to enjoy a highly profitable return, as the shares were available at prices below 1,800p for the best part of six months.

But so much for the brilliant opportunity Shell offered in the recent past. What of its valuation and prospects today?

Outlook then and now

Back at the time of the 2016 low, the stock was trading at the bargain-basement level of 10 times forecast 12-month earnings with a prospective dividend yield of 9.6%. The dividend actually turned out to be more generous, due to its sterling value being enhanced by the pound’s subsequent weakness against the dollar.

Today, Shell is trading on 16.4 times forecast 12-month earnings and the prospective dividend yield is 6.1%. The earnings multiple suggests to me that the share price is up with events and that it (and the price of oil) may struggle to move significantly higher in the absence of a favourable shift in the oil supply-demand outlook. The dividend yield may still be attractive for income seekers but, on balance, I’d rate the stock a ‘hold’ rather than a ‘buy’ at this time.

Sound prospect?

When Shell’s shares hit their 2016 low, those of Sound Energy (LSE: SOU) were changing hands for 16p. They’ve eclipsed the FTSE 100 giant’s gains with a 225% rise to 52p as I’m writing. Furthermore, with the number of shares in issue having doubled from just over 500m to just over 1bn, the market value of this AIM-listed company has increased 550% from £81m to £526m.

Sound is a very different kettle of fish to Shell. It has negligible revenue, negative earnings, no dividend and an accumulated deficit of £102m. A drilling programme in Italy, which it had been very optimistic about, ultimately proved to be sub-commercial. It’s now engaged in a drilling programme in Eastern Morocco, which it’s very optimistic about. However, it is rightly cautions: “There can be no guarantee that its current estimates of volumes of gas originally in place will be substantiated by exploration drilling or would actually be available for extraction.”

With little in the way of proven commercial reserves and everything resting on potential, this is not the sort of stock that interests me. Indeed, if I happened to have been gifted shares I’d be inclined to sell them, as the market cap of £526m seems awfully high in the circumstances.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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