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Why I’m Bullish On Royal Dutch Shell Plc For 2016

Like it or not, no investment is without risk. Certainly, some asset classes such as bonds and cash come with reduced risk compared to shares. But even they run the risk of default in the case of the former and inflation in the case of the latter. In fact, even the riskiest of shares can hold appeal if they offer sufficient potential rewards given their long-term outlook.

One sector that appears to be among the riskiest at the present time is oil. With its price showing no sign of staging a recovery anytime soon, it would be unsurprising for it to continue to fall during the first part of 2016. As such, investors in this space must brace themselves for the possibility of further pain.

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However, in the long run, energy appears to be a superb sector in which to invest due to population increases, as well as rising wealth in the developing world. The end result of both of these factors is higher demand for energy. And with estimates varying as to the extent of this, one thing appears to be consistent – that is, fossil fuels such as oil and gas will still make up a significant proportion of the world’s energy mix even in the very long term.

The long game

Therefore, buying financially sound oil companies right now could be a highly profitable long-term move. One stock that appears to fit the bill is Shell (LSE: RDSB). Clearly, 2015 has been a horrific year for its share price, with it being among the 10 worst performers in the FTSE 100. But it looks set to survive the current downturn and, more importantly, strengthen its own position relative to its peers.

Evidence of this can be seen in the fact that Shell is proceeding with a $70bn deal to purchase BG. While many of its peers are worried about surviving the next year, Shell is thinking long term and is taking advantage of discounted prices to improve its asset base and position itself for improved future growth. Encouragingly, its balance sheet will remain very strong even after taking on additional debt to fund the deal and the company’s cash flow could realistically cope with further acquisitions in future.

Furthermore, Shell currently trades on a price-to-earnings (P/E) ratio of just 12.3 and yields 8.4%. Although there’s scope for a dividend cut and a further fall in its share price, both of these figures indicate that Shell offers good long-term value for money. As such, a purchase now could lead to a profitable 2016 from an upward rerating and a high income return.

Undoubtedly, there are significant risks ahead for Shell and things could get worse before they get better. But for long-term investors now could be a time to buy, rather than sell, the oil major.

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Peter Stephens owns shares of Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. 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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