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Should I Invest In Royal Dutch Shell Plc Now?

royal dutch shellRoyal Dutch Shell’s (LSE: RDSB) (NYSE: RDS-B.US) third-quarter results are due out at the end of the month. With a bit of luck they’ll show the firm progressing nicely towards the 41% earnings’ uplift City analysts are expecting for 2014.

That might sound like great progress but it comes on the heels of last year’s 39% earnings’ decline. So the best we can hope for is a return to where we started on earnings two years ago.

Is growth a possibility?

Shell’s cyclicality keeps the financial results wiggling about. Factors such as the timing of capital expenditure on big projects and volatile output prices can drag on profits and cash flow.

However, new oil discoveries can boost the firm’s net asset value, which is the best driver of growth in the long run. Assets are rising, but the pace is pedestrian:

Year to December

2009

2010

2011

2012

2013

Net asset value per share (cents)

2,168

2,360

2,680

2,742

2,809

Shell’s working on the problem of growth. The directors aim to improve investor returns by targeting better financial performance, enhanced capital efficiency and strong project delivery. They plan a selective approach to project execution and to dispose of $15 billion worth of assets during 2014-15.

Such targets could mean around 30 major projects will add about seven billion barrels of oil or gas equivalents to Shell’s reserves before the end of 2015. That could improve cash flow by several billion dollars. It’s hard for directors to come up with exact estimates for cash because a weak oil price, as we are seeing, diminishes returns from production.

Cash pays the dividend

Any improvement in cash flow is welcome. Over recent years, fluctuating cash flow has kept the dividend pegged down and struggling to grow each year:

Year to December

2009

2010

2011

2012

2013

Dividend (cents)

168

168

168

172

180

At today’s share price of 2287p, the forward dividend yield is running at 5.2% for 2015. The firm expects adjusted earnings to cover the payout about twice. That’s not to be sniffed at, but earnings that year will likely come in flat as the firm’s two-steps-forward-one-back performance on earnings continues. The forward P/E rating sits around 10. That’s not a high rating, but Shell isn’t a very exciting investment proposition.

Not exciting, but safe, though? Not to my mind. The oil industry’s inherent volatility, and the dangers faced in the firm’s operations, throws up plenty of investment risk for those in Shell.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.