The Contrary Investment Case: 3 Reasons Why Royal Dutch Shell plc Could Be A Buy

royal dutch shell

In recent days I have looked at why I believe Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) is in danger of careering lower (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors that could, in fact, make Shell a stellar stock selection.

Drill for terrific value with Shell

The unpredictable nature of oil exploration is no secret, where the timing and extent of potential payloads can often disappoint. But for black gold bugs looking for a cheap entry into the market, Shell could be considered excellent value for money.

The firm is expected to deliver earnings growth of 32% and 5% in 2014 and 2015 respectively, projections which create P/E readouts of 11.2 and 10.6. These figures compare extremely well with a forward average of 23.8 for the rest of the oil and gas producers sector.

Work continues on major upstream projects

Shell is working exceptionally hard to rid itself of non-core assets in the face of worsening refining conditions and to bolster its balance sheet. The oil giant has stepped up its upstream and downstream divestments across the globe over the past year, and just this month announced plans to offload a number of its Australian downstream assets to Vitol for $2.9bn.

The company’s asset-stripping scheme, not to mention vast capex scalebacks, is seen by many as hugely worrisome for its growth potential in coming years. But for others the streamlining scheme is seen as essential given wider industry problems, while Shell’s focus on driving production at its ‘super projects’ should drive future revenues.

Indeed, first flows at the massive Na Kika upstream project in the Gulf of Mexico were reported last week, and another well is expected to be spudded during the second quarter. Shell is a 50% stakeholder in the project along with BP.

Dividends expected to rise

As I have discussed previously, a combination of rising costs and worrying forecasts for the oil price could dent dividend growth over the long term. But some commentators are less pessimistic over the condition of the industry, and who also believe that the firm’s sizeable cash pile should support solid payout growth.

Indeed, Royal Dutch Shell is expected to keep lifting the annual dividend over the medium term at least, with last year’s 180 US cent per share dividend expected to rise to 189.9 cents in 2014 and 194.3 cents in 2015. These payments generate hefty yields of 4.8% and 4.9% correspondingly, obliterating a forward average of 3.2% for the FTSE 100.

On top of this, Shell is also keeping its generous buyback scheme rolling, having returned $5bn to its shareholders last year alone.

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> Royston does not own shares in any of the companies mentioned in this article.