Oil giant Royal Dutch Shell (LSE: RDSB) has seen an encouraging share price trend over the past year, with 29% increase. But over the past two years, it has actually declined by 45%. As an investor, this creates a conundrum for me. Am I supposed to expect that it will rise or fall from here?
I reckon it can rise in the foreseeable future, at least. Let me elaborate. The reason why it fell over the last year is no secret. Coronavirus took a toll across the economy, and that includes Shell. Investors were understandably skittish, sticking close to safe stocks than cyclical ones. Cut to now, and the economy is vastly improved. Oil prices have rallied and there is optimism in the air. It is little wonder that the Shell share price has risen.
Royal Dutch Shell sees improved financials
And I think it can rise more, precisely because it is still so much lower than it was two years ago even though its numbers have improved. Yesterday, it released its financials for the first half of 2021, continuing the upward trend from last quarter. Its net profit increased by a huge 150% to $9bn compared to last year. This is partly because last year was a washout, when the company reported a net loss.
But even if I compare this year’s numbers to those in 2019, Shell has still seen a small increase in profit. Its gearing ratio at 27.7% is back to its levels two years ago, indicating more reasonable debt levels from last year. Yet its share price is almost half of where it was two years ago.
Dividends and buybacks are positive for the price
Its still-limited dividend payout is one reason for this. Dividends are up from last year, but they are still at less than half their 2019 levels. However, if its dividends continue to rise, so will its attractiveness to investors. Also, with share buybacks underway, its price could rise too as each share possibly becomes more valuable.
Also, the outlook for the economy is quite sunny for this year and even the next. Oil demand is sensitive to economic growth, so it should continue to perform for the rest of the year as well.
Conservative guidance and carbon emission challenges
At the same time, Shell’s guidance is far from inspiring. It is still cautious about macroeconomic conditions. The company’s production could be impacted too. In other words, the bounce-back in the share price may not come quickly.
Also, the long-term future of oil companies is still a big question. The world is moving away from polluting fuels as technology to support clean energy at competitive costs develops. While the company is taking steps in this direction, it may be struggling to. Recently, it has challenged a ruling in the Netherlands that it has to reduce its global net carbon emissions by 45% by 2030 from 2019 levels.
Would I buy the Shell stock?
All in all though, I think there is more of a case for a share price increase than not. So I could buy more Shell stock for the next three to five years.
