Why Investing Royal Dutch Shell can be so Lucrative

 

Dear PGM Capital Blog readers,

In this weekend’s blog article, we want to discuss with you why investing in Royal Dutch Shell can be so lucrative.

INTRODUCTION:
Royal Dutch Shell plc (RDSA.AS or RDSA.L or NYSE: RDS.A), commonly known as Shell, is an Anglo-Dutch multinational oil and gas company headquartered in the Netherlands and incorporated in the United Kingdom.

The company was created by the merger of Royal Dutch Petroleum and UK-based Shell Transport & Trading and is the seventh largest company in the world as of 2016, in terms of revenue.

On 8 April 2015, the company announced that it had agreed to buy BG Group for £47 billion (US$70 billion), subject to shareholder and regulatory approval. 

The acquisition was completed in February 2016, resulting in Shell surpassing Chevron Corporation and becoming the world’s second largest oil company.

The company Shell has a primary listing on the London Stock Exchange and the Amsterdam Stock Exchange and is a constituent of the FTSE-100 and AEX-25 Index.

COMPANY PROFILE:
Royal Dutch Shell plc operates as a decentralized independent oil and gas company business worldwide with companies in over 100 countries, each of which operated with a high degree of independence. It operates through Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas, and natural gas liquids.

It also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.

In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, liquefied natural gas (LNG) for transport, lubricants, bitumen, and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.

Further, it is involved in the exploration, development, production, liquefaction, and marketing of hydrocarbons; purchase, sale, and shipping of LNG and regasified natural gas; and production of base chemicals comprising ethylene, propylene, and aromatics, as well as intermediate chemicals, such as styrene monomer, propylene oxide, solvents, detergent alcohols, ethylene oxide, and ethylene glycol.

PGM CAPITAL ANALYSIS & COMMENTS:
Shell has managed to improve the efficiency of its downstream business by deploying higher grade feedstock and improving supply. As a result, the company has been able to generate stronger returns from a more streamlined portfolio, improving its earnings, cash flow, and returns over the years.

Additionally, despite lowering its marketing volumes by 30% and refining capacity by 20%, the company has managed to retain its margins in the refining business. This is shown in the chart below:

Dividend Policy:
Shell’s policy is to grow the US dollar dividend in line with their view of the underlying earnings and cash flow of the company.

Beginning with its first quarter interim dividend for 2015, RDS provides eligible shareholders with a choice to receive dividends in cash or in shares via a Scrip Dividend Programme.

When setting the dividend, the Board of Directors looks at a range of factors, including the macro environment, the current balance sheet and future investment plans. In addition, we may choose to return cash to shareholders through share buybacks, subject to the capital requirements of Shell. It is our intention that dividends will be declared and paid quarterly.

• Dividends are declared in US dollars and we announce the euro and sterling equivalent amounts at a later date.
• Dividends declared on Class A shares are paid by default in Euros, although holders of Class A shares are able to elect to receive dividends in sterling.
• Dividends declared on Class B shares are paid by default in sterling, although holders of Class B shares are able to elect to receive dividends in Euros.
• Dividends declared on ADSs are paid in US dollars.

Please refer to the dividend timetable for dates relevant to Shell’s dividend.

As can be seen from below dividend yield chart of the company, based on its closing price of Euro 21.56 a share on Friday, April 8th, the company’s dividend has a yield of 7.57%.

Please refer to the dividend-yield timetable Shell’s dividend yield date by date.

Thus, an improvement in the crude oil market will be a tailwind for Royal Dutch Shell’s downstream business. Moreover, since Shell has focused on improving the efficiency of its downstream operations, it will be able to improve its earnings and returns and subsequently its dividend payout.

Based on the above we have a STRONG BUY rating on the shares of the company and see it a hedge against the low crude oil price and low Euro-USD exchange rate.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that commodities prices and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.