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Is Royal Dutch Shell plc The Best Buy In The FTSE 100?

The last few weeks in the Oil & Gas sector has been eventful. OPEC chose not to cut its output rates and then the oil price fell off a cliff. Currently WTI sits just above $36 and Brent’s not much better at around $38. This has sent Royal Dutch Shell (LSE: RDSB) down to levels not seen since 2009. The share price is currently below 1,500p. 

For me this represents a huge buying opportunity that shouldn’t be missed. Shell has a whopping dividend yield of over 8% and a PE ratio of 7.7. The market believes that a dividend cut is inevitable but I’m not so sure. The dividend record of Shell is impeccable and this isn’t the first oil price decline the company has been through. The dividend cover is solid due to the flying profits of the downstream division. This is because integrated oil companies have huge downstream divisions that offset losses from the upstream division when the oil price falls. 

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Cost controls

In response to the decline in the oil price Shell has reduced costs and capital investments to make the company “more focused and competitive”. And there have been divestments across the globe to make Shell a more streamlined company before the BG deal. 

Many believe that the BG Group (LSE: BG) will push the company forward and ensure its future. It has now passed regulatory approval in Europe, Brazil, Australia, the US, and as of yesterday in China. This merger will ensure the dividend for years to come due to BG’s ultra low cost developments in Brazil and Australia. I also believe that Shell will do anything to ensure the deal goes through. CEO Ben Van Burden has said that he will do everything he can to ensure the takeover goes smoothly and there have also been staff cuts in the thousands to get the company ready for the deal. Only yesterday the company announced it was cutting around 3% (2,800) of the enlarged workforce. It has also said there will be over $3bn worth of cost synergies after the deal and this should aid Shell’s bottom line hugely. 

BG share opportunity

RBC said yesterday that the preferred play here is to buy BG shares as a way to get Shell shares at a discount. Even though the deal has now passed all regulatory approvals there is still merger arbitrage to be played. Currently the offer premium stands at around 13%, this means that the BG share price is trading around 13% lower than the offer is worth in terms of the cash and Shell shares that will be received. For anyone looking to increase a holding or open a position in Shell, it’s a very attractive opportunity and one that deserves to be looked at in detail. 

Obviously there can be no assurances that the deal goes through. However, the rhetoric from Shell indicates it will happen at all costs. I believe that the enlarged group will be a fantastic investment in years to come in terms of capital growth and income. 

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Jack Dingwall has shares in 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.

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