With claim and counter-claim this week over whether Iran carried out attacks against oil tankers in the Gulf of Oman, near the key shipping route in the Strait of Hormuz (where similar attacks have taken place in the past), crude price fluctuations are once again drawing attention to the major oil players. This is, I think, the perfect time to look at Royal Dutch Shell (LON:RDSa) (LSE: RDSB).
First, it is worth noting that though oil prices may be spiking at the moment on the back of the tanker news, this is likely to be a fairly short-term reaction as the headlines and controversy subside. However, more fundamentally, the increased risks for anyone shipping oil in the region will likely add to the costs of doing so. Higher insurance, increased danger and higher salaries for staff, and the potential for more costly alternative shipping are all likely to filter through to the cost of oil itself eventually.
Naturally, crude prices are subject to many other factors, not least of which in the coming year or two could be OPEC’s reductions in output (set to bolster prices), and the increased production growth in non-OPEC countries, particularly the US (likely to weigh on prices). That said, Shell is a blue-chip investment that is able in many ways, to weather these price fluctuations and bring value to its shareholders.
Dividend-focused The company has historically been a great dividend income stock, paying a yield in the solid 5% to 6% region each year, with dividends themselves showing at a 5% rate for the past five years. What’s more, the firm took the fairly unusual step earlier this month of promising up to $125m in cash returns for investors through dividend payments and share buybacks, over the next five years or so.
Looking at the rest of its fundamentals, Shell has shown solid growth in revenue and net income for the past few years, and has been reducing debt even in the wake of its BG Group deal in 2016. At the same time, the company is not resting on its laurels, setting out capital expenditure plans to the tune of $30bn a year between 2021 and 2025.
The company has said that while crude remains above $60/bbl, it should see free cash flow in the region of $35bn a year, bringing in more than enough money for it to both maintain its current exploration and production business, while at the same time investing in renewables. The company recently said that the bulk of its investment will be “in themes that drive energy transition”.
Perhaps even more unusually for such a large and established firm is that it has shown a willingness to look at entirely new revenue streams, and a sensibly pragmatic approach to ending those ventures if they fail to work. A perfect example of this is with its unusual move last year of testing an Uber-style car-hailing service, which this week it announced its intention to scale back (read probably discontinue).
Admittedly Shell’s shares may not be cheap at the moment, trading not too far away from all-time highs, but when you look at this company, I think you can see why. I would watch out for any short-term dip in prices as a buying opportunity, but perhaps I will not wait too long to invest if none are forthcoming.
Karl owns shares of Royal Dutch Shell. 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.
Motley Fool UK 2019