Why Royal Dutch Shell Plc Is Still My Top Resources Pick

With the resources sector having endured a tough period, there are bargains aplenty for value investors. Certainly, there’s a good chance that things will get worse before they get better, with there being a risk of further falls in the prices of a range of commodities. However, with valuations being relatively low and the prospect of a recovery being reasonably high in the long run, buying now could prove to be a sound move.

In terms of the one stock that stands above all others in the resources space, Shell (LSE: RDSB) is very difficult to beat. A key reason for this is its financial standing, with the company enjoying a mix of strong cash flow and a very sound balance sheet that contains only a modest amount of debt. This means that Shell offers greater stability and resilience than many of its resources sector peers and if things do worsen for the sector, Shell could survive and outlast many of its peers simply because it’s more financially sound.

Powerful strategy

This financial firepower also provides Shell with the opportunity to buy undervalued assets. This has formed part of its strategy, with the company buying up BG and also reducing costs and exploration expenditure. This seems to be the right move since the oil price could remain at a low ebb for a number of years, although in the long term the recovery chances for oil seem to be relatively high.

That’s at least partly because oil and gas are likely to remain key parts of the energy mix for the emerging world in particular, and with the growth rate of such economies likely to remain high, the prospects for global oil demand are set to improve in future years. That’s especially the case since supply may come under pressure if higher-cost producers exit the industry. In fact, such a situation could benefit Shell in the long run, since it may be able to strengthen its position relative to peers simply because it has a highly competitive cost curve and only modest debt levels given its size and scale.

Dividend appeal

Of course, there’s much more to Shell than resilience and size. The company also offers a generous dividend which, despite being likely to come under pressure over the medium term, is likely to remain more robust than is the case for most of Shell’s resources peers. So, while the current yield of 7.8% may not be received by the company’s investors indefinitely, compared to most of Shell’s resources peers, its ability to pay a higher yield than the wider index seems to be rather bright.

Furthermore, with Shell trading on a price to earnings growth (PEG) ratio of just 0.2, it seems to offer excellent value for money, too. Certainly, it comes with considerable risks versus its index peers, since Shell is subject to external factors which affect the price of oil and therefore could severely hurt (or improve) its profit outlook. However, this is the case for all resources stocks and with Shell having a sound financial background, the right strategy given its outlook and top-notch income and value prospects, it remains a very appealing resources play within a highly enticing sector.

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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.