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Oil is going down but Royal Dutch Shell plc is on the up

Brent crude is now only a splash above $50. West Texas Intermediate has dripped to around $48. Predictions that oil would hit $60 or $70 on last year’s OPEC and non-OPEC production cuts have been shown to be desperately optimistic, and oil looks a tough play right now.

Straight to Shell

The share price of Anglo-Dutch major Royal Dutch Shell (LSE: RDSB) flew upwards in the wake of the OPEC deal, hitting a 52-week high of 2,390p in early December. After management’s campaign of cost-cutting, non-core disposals and capex slashing, analysts reckoned it could break even at around $55-60, which would help to sustain its proud record of never having cut its dividend since the war.

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Shell still trades 30% higher than a year ago, but has dropped more than 8% since December’s highs, falling to 2,194p as the oil price slips and reality sinks in. Too many analysts are still living in the 1970s, when OPEC ruled oil markets, and by extension, the world. The West was at their mercy, as we saw during the 1973 energy crisis. The shale revolution has swept that world away.

Shale fellow well met

The US was vulnerable in the early 1970s, as domestic production peaked, but it isn’t vulnerable today, sitting on the Texas Permian Basin and a host of other non-conventional deposits. OPEC may have taken one million barrels a day off the market but inventories are still rising, and the oil price is still falling. So where does this leave Shell?

2016 shows a mixed picture, further complicated by its $70bn takeover of FTSE 100 energy giant BG Group. However, the cash did start flowing towards the end of the year, with $9bn gushing in during the final quarter, helped by rigorous cost slashing and its ongoing $30bn disposals programme. It recently announced $7.25bn worth of Canadian oil sands divestment and further North Sea oil sales are likely, as Shell’s boss, Ben van Beurden, looks to build a “younger, rejuvenated portfolio“.

Power on

Shell still faces a battle with debt — excluding finance lease liabilities it stood at $77.6bn in December, up from $52.19bn one year earlier. However, the pile is down from a high of $83.2bn in September, so it is heading in the right direction. The dividend looks safe for now, but Shell has funded it from borrowings lately, and if the oil price keeps sliding, something has to give.

Shell is also investing in shale, ploughing $300m into a oil and gas reserve in southern Argentina, and boosting the efficiency of its US and Canadian shale operations by 50%. As a result it can make a profit even at today’s low price in its Permian sweet spots, through the joint venture with Anadarko. Shale makes up less than 10% of its profits, but total reserves are impressive at around 12bn barrels. The company also has diversification through liquid natural gas.

Crude facts

Shell’s recent efforts have almost put the company in charge of its destiny but there is one thing it cannot control: the oil price. With US crude stockpiles climbing to a new high, now could prove a risky time to invest, despite the tempting 6.56% yield.

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Harvey Jones has no position in any shares mentioned. 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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