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Why I’d buy the Shell share price fall

Investors hoping for a sustained rise in the oil price this year have been disappointed. As oil fell from more than $85 per barrel in early October to today’s price of about $60, sector share prices have followed suit.

My view is that this sell off has created some good buying opportunities for investors. But I don’t think everything that’s fallen is a compelling buy.

Today, I’m going to take a fresh look at the case for investing in FTSE 100 giant Royal Dutch Shell (LSE: RDSB).  But first, I want to consider the outlook for a smaller firm in the oil services sector.

Record results risk slowdown

Energy services group Hunting (LSE: HTG) makes most of its money providing equipment and services to US shale drillers. During the first half of this year, the firm’s US operations reported record profits. But the group’s operations in Asia Pacific, Canada, Europe and the Middle East all remained loss-making.

Unfortunately, US demand now seems to be softening slightly. In a year-end update today, the firm said that lower oil prices and pipeline bottlenecks in the Permian basin meant that operators were delaying well completions. This has led to “some market softness” for Hunting’s US onshore operations.

As we head into 2019, the company expects market conditions could lead some customers to delay purchasing decisions. This cautious outlook had sliced 8% off the firm’s share price at the time of writing.

A buying opportunity?

Hunting’s balance sheet seems to be in good shape, with net cash of $44.6m reported as of 7 December. So there’s no risk of a financial crisis.

However, with the group’s non-US businesses continuing to report losses, I don’t see any great rush to buy Hunting stock. I’d prefer to invest elsewhere in this sector.

3 reasons why I’d buy Shell

Shell has always been a popular choice with income investors. There are good reasons for this, one of which is this ‘supermajor’ has not cut its payout since World War II.

Shell’s share price has fallen by 13% since oil prices started to head south in October. But profits aren’t solely dependent on crude oil. An increasing focus on natural gas has helped to reduce dependency on oil prices, while the group’s refinery operations have historically benefited from lower oil prices.

Looking ahead, some investors worry that a focus on fossil fuels means this business could become a dinosaur. I’m not so sure. Shell is investing in renewables and recently surprised the market by making a commitment to halve the carbon footprint of its products by 2050.

I’d also argue that at current levels, Shell’s shares are cheap enough to price in most of the risks facing the firm. Trading on about 10 times forecast earnings, investors can buy a well-supported 6.1% dividend yield that looks extremely safe to me.

The short-term weakness in the oil price may slow profit growth, but there’s no sign yet that the company expects any serious impact. Big swings in the price of oil are fairly normal and analysts’ forecasts have only dipped slightly over the last three months.

In my view, Shell remains one of the safest long-term income buys on the stock market. I’d be happy to tuck some of these shares away today for the next 20 years.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.