A Superior Student Analysis on Royal Dutch Shell

By Anand Singh, University of Warwick

Overview

 Royal Dutch Shell is a multinational oil and gas company which has come under recent fire from investors and environmental groups for not refusing to scale back their oil and gas production in the coming decades unlike their competitor BP who have pledged to reduce their amount by 40% by 2030. They also must pay $111 million in damages over an oil spill in Nigeria and have been ordered by a Dutch court to reduce carbon emissions by 45%, a decision which Shell intends to challenge. This recent negative coverage has reduced the value of Shell stock by 3.88% in the past six months. 

Analysis

 The earnings per share (EPS) of Shell in 2020 was $4.95, higher than the EPS of its main competitor BP whose EPS is $3.12. There is more good news as the EPS of Shell is projected to increase by 293% which beats the industry average rate of growth by 24%.

One of the main reasons why Shell is expected to outperform the industry is because of their latest project in the Gulf of Mexico which holds 490 million barrels of oil. The oilfield was originally discovered in 2017 and Shell plans to start drilling in the coming few months. Discovery of this oilfield is extremely advantageous for Shell because they anticipate having an initial rate of return, the rate at which the project breaks even, of over 25% which is significantly higher than the industry average of 10 to 15%. 

The second reason to be optimistic about the future of Shell is because of their cash flow growth. Cash is needed for any company in order to fund new projects without having to raise expensive funds from outside sources. Currently, Shell oil’s cash flow growth is 26.9% which is significantly higher than its competitors. Astoundingly, the industry average for the upcoming year is -31.3%, a contraction. New projects are important for business growth because they increase the share price of the company due to increased revenues and profit. Therefore, increased cash flow is an indicator of a company which has the ability to increase their share prices in the near future.

The third reason to buy Shell stock is their current yield. The yield on a stock which pays dividends to its owners is calculated by dividing the dividends per share over the current share price. If a share price is $20 and the dividend is $1 then the yield is 5%. Shell increased their quarterly dividend by 50% and is aiming to increase by 4% annually. Thus, investors who are looking for high yielding dividend stocks should look into investing in Shell.  

Conclusion

Despite the recent negative coverage of Shell, it seems like the perfect time to invest in Shell due to their room for growth in the future. The combination of weak competitors, new projects starting in the recent future and plenty of cash in hand brews a perfect storm for Shell to outperform expectations.

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