Is Royal Dutch Shell plc Really A Bargain Stock Selection?

In this article I am explaining why Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) remains a precarious share selection despite its lowly share price.

Price to Earnings (P/E) Ratio

Royal Dutch Shell has suffered significant earnings weakness in recent years, as a backdrop of weakening oil prices, rising costs and operational problems in key production centres such as Nigeria has weighed heavily.

The company has engineered an extensive divestment and cost-cutting scheme to mitigate these issues, however, and City analysts Oil wellexpect earnings growth to return from this year onwards. Current projections leave the oil colossus dealing on P/E multiples of 11.2 and 11.1 for 2014 and 2015 respectively, within touching distance of the bargain benchmark of 10 times prospective earnings.

Price to Earnings to Growth (PEG) Ratio

Indeed, forecasts point to an explosive 38% rise in earnings this year, a figure which creates an extremely low PEG rating of 0.3 — any reading below 1 is generally classified as terrific value. And by comparison the wider oil and gas producers sector carries corresponding reading of 2.8.

However, a more muted 1% improvement is currently pencilled in for 2015, resulting in a PEG rating of 10.8.

Market to Book Ratio

After subtracting total liabilities from total assets, Shell’s book value comes in at £108.4bn. This figure leaves the fossil fuel specialist carrying a book value per share of £17.22 per share.

Consequently Shell sports a market to book ratio of 1.4, floating just above a reading of a 1 which generally represents outstanding value for money.

Dividend Yield

The impact of the 2008/2009 financial crash forced the group to keep the dividend on hold for three consecutive years, at 168 US cents per share, until 2012. However, Shell’s ability to chuck up boatloads of cash — helped by its ongoing asset shedding scheme — has enabled it to get dividends rolling higher again over the past couple of years.

And analysts expect the firm to lift 2013’s 180 cents dividend to 187.7 cents this year and to 192.2 cents in 2015. These prospective payments create chunky yields of 4.6% and 4.7% respectively, far ahead of a prospective average of 2.6% for its oil sector peers.

A risky share selection

Although at first glance Royal Dutch Shell could be considered a premier value pick, in my opinion the firm’s lowly price rating reflects the high level of risk which could whack current earnings projections. A worsening supply glut looks set to drive oil prices much lower in the next few years, and with it the firm’s revenues outlook, while over the longer term the firm’s aggressive asset stripping threatens to undermine earnings growth.

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> Royston does not own shares in Royal Dutch Shell.