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Royal Dutch Shell Plc vs Premier Oil PLC: Which Oil Producer Wins?

One of the most appealing aspects of Shell (LSE: RDSB) (NYSE: RDS.B.US) is its consistency. Certainly, it is likely to be hit hard in the current year, with its financial performance likely to decline due to a lower oil price, but Shell is one of the few companies within the energy sector that has the financial firepower to take advantage of short term challenges to generate improved long term returns.

Take, for example, its planned takeover of BG. Although this is a huge deal, with Shell bidding £47bn in an attempt to become the world’s biggest gas producer, Shell can easily afford such a move. That’s because of its supremely strong cash flow, strong balance sheet and sufficiently high competitive advantage to ensure that, on a relative basis, its performance should remain impressive even when oil is trading close to $50 per barrel.

Contrast this situation with Premier Oil (LSE: PMO) which, while having an excellent asset base that is full of opportunity for long term growth, was forced to significantly write down its assets last year. This led to a loss and, while its cash flow and financial standing remain strong, further asset writedowns cannot be ruled out – especially if, as expected, the oil price fails to make substantial moves northwards over the next few years.

Still, this situation appears to be reflected in Premier Oil’s valuation. In fact, it trades at a huge discount to net asset value, with it having a price to book (P/B) ratio of just 0.63 and this indicates that the market is anticipating further asset writedowns. And, while Shell is also very cheap when compared to the value of its asset base, with it having a P/B ratio of 1, it clearly is not as much of a bargain as Premier Oil at the present time.

Furthermore, investor sentiment in Premier Oil should improve over the next few years. That’s because it is forecast to move into profitability next year, with its bottom line set to rise by a further 23% in the following year. This is clearly great news for the company’s investors and, with a price to earnings growth (PEG) ratio of 1.1, Premier Oil could deliver excellent share price gains moving forward.

However, Shell’s size and scale not only kept it profitable last year, it is expected to remain profitable this year and then grow its earnings by 28% next year. That’s higher the Premier Oil’s forecast growth rate and, moreover, Shell also trades on a lower PEG ratio than Premier Oil, with it having a PEG ratio of 0.4. As such, Shell seems to offer a better mix of growth, value and consistency than Premier Oil.

Of course, both stocks could be set for a challenging period if the oil price does decline and, while they are cheap, they may become even cheaper in the short run if external factors go against them. However, even if this occurs, Shell has the long term outlook to take advantage of it, perhaps through further acquisitions, as well as a considerable margin of safety to ensure that shareholder returns, on a relative basis at least, should remain very impressive. As such, it remains a better buy than Premier Oil at the present time.

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Peter Stephens owns shares of 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.