Royal Dutch Shell Group Plc Is A Slow Burner

royal dutch shellThe last few years have been a damp squib for investors in Royal Dutch Shell (LSE: RDSB). Its share price barely shifted in 2012 and 2013, while 2014 opened with a profit warning, which Shell blamed on falling oil and gas prices, and difficult refining conditions. But now there are signs the Anglo-Dutch oil major is sparking into life.

January’s profit warning was a disappointing start to new chief executive Ben van Beurden’s tenure, but I wrote at the time that it might work in his favour, by giving him a platform to make radical changes. Trading at a forward price/earnings ratio of 8.7 times for December 2014, against 13.3 for fellow underperforming oil major BP, I wrote in January that it looked like a buy to me.

Van The Man

At the time, it traded at 2240p. Today, you pay 2552p, some 14% more. Shell isn’t on fire, but it has been a slow, steady burner. The market was satisfied with Q1 earnings of £4.5 billion, even though they were sharply down on the £8 billion Shell earned in the first quarter of 2013. Low expectations always help. 

Investors drew comfort from van Beurden’s $15 billion divestment programme, his campaign of targeted cost savings, and the company’s gushing cash pipeline. Shell pumped out $14 billion of cash in the first quarter, up from $11.6 billion one year earlier. No wonder investors were willing to overlook troubles in Ukraine, even though Shell has operations in Russia. Happily, US sanctions have so far only targeted individuals.

Shell Shellacks Shale

Shell has been scaling back its ambitions, shunning shale gas, selling its 23% interest in the Brazilian deepwater project BC-10 to Qatar Petroleum International for $1 billion, and offloading Australian refinery and lubricant assets for $2.6 billion. It has also pulled out of a proposed gas-to-liquids plant in Louisiana, USA. This lack of bravado may disappointment some, but Shell is now a less risky, more focused investment.

The share price may be a slow burner, but the dividend continues to shine brightly, thanks to a 4% rise in Q1. Today, it yields 4.2%, against 3.5% for the FTSE 100 as a whole. Shell isn’t quite as cheap as it was in January, but it doesn’t look overvalued either. Today, it is on a forecast 11.7 times earnings for December.

I’m optimistic that Shell will continue to smoulder, with more buybacks driving shareholder returns. With a new-ish man at the helm, the momentum should continue for some time. Forecast earnings per share growth of 38% for this calendar year and only add to my warm glow. You can’t be sure of anything in investing, but right now, I’m pretty sure of Shell’s prospects.

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Harvey doesn't own shares in any company mentioned in this article