Why I’d invest £2,000 in Royal Dutch Shell plc and this ‘secret growth stock’

Harvey Jones says Royal Dutch Shell plc (LON: RDSB) and this recovering oil explorer could make a great combined play.

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With the price of crude pushing $70 a barrel, oil investors are enjoying some much-needed respite. The price could go higher still, especially if Donald Trump’s appointment of foreign policy hawk John Bolton signals a tougher line on Iran, which could hit supply. Here are two very different ways to play black gold’s recovery.

Prince Caspian

London-listed Nostrum Oil & Gas (LSE: NOG) is an independent multi-field oil and gas company operating in the pre-Caspian Basin, with operations in Kazakhstan. This morning it issued its full-year figures for the year to 31 December, and the stock has crept up 0.48% as a result. However, it still trades 25% lower than 12 months ago, after suffering operational struggles over the last year.

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2017 revenues grew 16.5% to $406m year-on-year, while EBITDA grew almost 20% to $232m, with margins climbing 150 basis points to 57.2%. The downside is that net operating cash flow slumped from $202 to $183m, while net debt increased from $858m to $961m. Average daily sales volumes dipped to 37,844 barrels of oil equivalent per day, down from 39,043 in 2016.

Challenging times

CEO Kai-Uwe Kessel admitted that 2017 was a challenging year operationally for the £573m company, with a delay to the completion of its GTU3 project and some disappointing results from “watered out” wells, which knocked 3.1% off sales volumes. However, positive results suggest it may have more reserves than thought in a new northern area in the Chinarevskoye field.

Nostrum successfully refinanced all of its debt due in 2019, taking advantage of lower oil prices to reduce the cost, and now has no maturities until 2022. My Foolish colleague Peter Stephens recently noted that it offers a potentially high level of capital return. City analysts are forecasting 651% growth in earnings per share (EPS) this year, and another 110% in 2018. That should reduce its valuation to just nine times earnings.

Out of its Shell

Nostrum is worth further examination and here is a more mainstream way to play the oil price recovery, this time with a juicy dividend. Last month, oil major Royal Dutch Shell (LSE: RBS) reported that its profits more than doubled in the fourth quarter, due to higher oil prices and increased efficiency, yet its investors are currently in a bit of a sulk.

The stock has actually fallen by around 9% over the past three months after Q4 cash flow weakened. This hit hopes that Shell will further increase its dividend to offset the damage done by last November’s decision to scrap its scrip dividend, which paid investors in shares.

Dividend delight

Another concern is that management will focus on paying down debt, rather than rewarding shareholders. However, this may help to build long-term sustainability, and Shell certainly deserves applause for maintaining its dividend throughout the oil price slump, amid constant speculation that its proud post-war record of continuously rewarding investors would finally fall. The forecast yield is still an impressive 6%, covered 1.3 times, which is nothing to grumble about.

Shell’s EPS are forecast to grow 53% in 2018 and 9% in 2019, while the stock trades at a forecast valuation of just 13.1 times earnings. The recent dip looks like an excellent entry point to me.

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Harvey Jones 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.

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 considered, so you should consider taking independent financial advice.

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