Should You Buy Royal Dutch Shell Plc After Its Q4 ‘Update’?

Shares in Shell (LSE: RDSB) have fallen by 5% today after it released an update ahead of its fourth quarter results. The release states that Shell’s current cost of supply earnings are expected to be between $10.4bn and $10.7bn for the full year, which is a fall of almost 50% on the previous year’s figure of $19bn.

While disappointing, Shell has had to contend with a rapidly declining oil price and as a result of this, the company’s CEO has stated that he’s pleased with the operating performance in 2015. Central to that is Shell’s continued cost-cutting drive that will see it become a more efficient and leaner business in the coming years. This alongside the merger with BG, means that Shell’s long-term future remains relatively bright, despite a tough outlook for the industry.

Company confidence

With Shell’s gearing levels expected to be around 14% at the end of the year versus 12% last year, its balance sheet remains relatively sound. This is a key reason why Shell has today announced that dividends will amount to $1.88 per share for 2015 and will be at least that amount this year. While this news has apparently not enthralled investors (as demonstrated by Shell’s share price fall today), it shows that the company remains relatively confident in its long-term financial future.

Today’s update also provides information on the company’s cash flow, with Shell’s cash flow from operating activities expected to be between $29bn and $30bn for the full year. This highlights its financial strength and shows that further acquisitions can’t be ruled out following the BG deal. And with Shell maintaining a high level of production of 2.9m barrels of oil per day (BOPD) during the year, its market share remains relatively healthy.

Long-term value?

Looking ahead, Shell’s share price could come under continued pressure as the price of oil looks likely to fall. That’s because with Iranian sanctions being lifted, the supply of black gold could increase yet further in the coming months and cause its price to fall. However with Shell’s shares trading on a price-to-earnings (P/E) ratio of 10.1, they appear to offer good value for money even with the risk of further volatility in the company’s bottom line.

Additionally, Shell continues to offer an exceptionally high yield which, as stated in today’s update, will continue into 2016. In fact, Shell yields a whopping 10% at the present time and while dividend cuts could be on the 2017 horizon, even if dividends were halved, Shell would still be a relatively appealing income play.

While today’s update confirms that the oil industry is undergoing a hugely challenging period, it also shows that Shell is implementing a prudent strategy to take advantage of the current scenario. For example, it’s purchasing BG at what could prove to be a discounted price, is becoming increasingly efficient, has a very sound financial footing and with the confirmation of its dividend, remains a highly enticing income stock. As such, today’s update confirms that Shell appears to be a strong buy for the long term.

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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.