Why Royal Dutch Shell Plc Looks Set To Soar By 20%+!

While many of Shell’s (LSE: RDSB) (NYSE: RDS-B.US) major rivals have seen their share prices rise during the course of 2015, the Anglo-Dutch firm has seen its valuation decline by 12% since the turn of the year. The main reason for this is unease regarding the proposed takeover of BG, with the market seemingly wondering if Shell’s £47bn offer is simply too high given the issues that BG is currently facing and the fact that the oil price could feasibly remain at well below $100 per barrel for a number of years.

Financial Standing

Even after the deal goes through, Shell will remain one of the most financially sound oil majors in the world. That’s a major plus for investors, since the sector is likely to endure more pain when it comes to asset write downs, reduced cash flow and being forced to cut capital expenditure. However, because of Shell’s very strong cash flow, it may be in a position to fund further acquisitions and be able to take advantage of relatively low valuations in the sector. Furthermore, with a balance sheet that remains only modestly leveraged, it appears to be able to handle another major acquisition which could further boost its earnings.

In addition, Shell also lacks the external challenges of its main UK-listed rival, BP. It continues to see investor sentiment (and its finances) hurt by the compensation payments for the Deepwater Horizon oil spill, while BP’s greater exposure to Russia is also causing concern among investors as a result of the sanctions currently in place.

Growth Potential

Shell has very upbeat bottom line growth prospects with, for example, its earnings forecast to grow by a hugely impressive 28% next year. This is around four times the rate of growth of the wider index and shows that, while the oil price may be low, there is growth potential in the sector. And, better still for investors in Shell, its shares currently trade on a very appealing valuation that indicates considerable upside over the medium to long term.

For example, Shell currently has a price to earnings (P/E) ratio of 15 and, when this is combined with its growth rate, it equates to a price to earnings growth (PEG) ratio of just 0.5. This indicates that there is considerable upside and, even if Shell were to trade on a higher rating, its shares would still be relatively inexpensive compared to the FTSE 100.

In fact, if Shell were to trade on a P/E ratio of 18 (which would represent a premium to the FTSE 100’s P/E ratio of 16 and is 20% higher than its current level), it would equate to a PEG ratio of just 0.65. As such, due to the company’s strong growth forecasts, it could easily demand a rating that is 20% higher than its current level and yet continue to offer growth at a very reasonable price.

Looking Ahead

Clearly, there may be short term challenges for Shell as it seeks to integrate the assets of BG, with market sentiment likely to remain relatively weak in the short run. However, over the medium to long term, Shell’s financial strength, appealing valuation and excellent growth potential mean that a 20% gain in its share price is very realistic in 2015 and beyond.

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Peter Stephens owns shares of BP and Royal Dutch Shell. 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.