Investors seeking returns don’t need to look at small caps for big returns. The oil price looks to have bottomed out and there are many big oil andgGas companies that offer compelling value at current prices. Super-major Royal Dutch Shell (LSE:RDSB) may be your best investment of the year.
Royal Dutch Shell has a superb yield of 6.9%, which is backed up by Chief Executive Ben van Beurden’s comments that the company will not cut the dividend next year. These comments have shelved worries that Shell, which has not cut tits dividend since World War Two, was planning a dividend cut. This yield underpins the stock and it might just be the best income stock in London.
Focus on adding value
Shell has pledged close to $4bn in cuts this year and a more than 15% reduction in capital expenditure. This is in response to the dire oil price and has been accepted well by investors. Along with cuts in capital expenditure Shell is divesting many assets, which will bring in many billions in cash. This is all in aim of streamlining the company ahead of the merger with BG next year and strengthening the balance sheet. The company is selling non-core and ageing assets to free up cash and using the cash to focus on the core value adding assets that it owns.
The £47bn mega-merger with BG (LSE:BG) will provide synergies of $2.5bn and, crucially, will gives Shell access to BG’s Brazilian gas assets, which will be used to boost earnings in the future. At the moment the market doesn’t believe the merger will be successful due to competition problems. However, many believe that BG and Royal Dutch Shell has always been a merger waiting to happen and both companies went into it after sounding out advice on competition rules in various jurisdictions. These types of problems are mostly solved by asset sales to increase competition and I believe this is what the Shell plans to do in Australia, where a competition watchdog has queried the merger.
The end of the drilling in the Chukchi Sea has come as a disappointment for the whole industry, especially after so much money and time have been spent on the Burger J prospect. It is a real disappointment to walk away with nothing to show. There is however a silver lining. Shell was under immense political pressure whilst drilling and there must be a sense of relief not be under the spotlight any more with regards to Arctic exploration.
In conclusion Shell hashuge cashflows as well as a fantastic dividend yield. The merger with BG will come with billions of dollars in savings from synergies and will give Shell access to BG’s prized Brazilian assets. At its current share price Shell is a compelling investment and offers large capital growth as well as a solid income stream in the form of a quarterly dividend.
Jack Dingwall has a long position in the share 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.