Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) won’t be in the doldrums forever. Here are five ways it could make you rich.
1) By raising its game
Shell’s new chief executive Ben van Beurden wisely started his reign by getting the bad news out of the way, issuing the company’s first profit warning in 10 years. This did surprisingly little damage to the Anglo-Dutch oil major’s share price, because investor expectations were low in any case, and they were looking forward to van Beurden’s new broom. He plans to shift the company’s focus and priorities, and has got off to a quick start, by slamming the brakes on Shell’s exploration attempts in offshore Alaska. There is a lot to put right at Shell, but that also gives van Beurden room to take the necessary action.
2) And getting tough
The new chief executive is looking to boost financial performance and enhance capital efficiency. This should include “hard choices on new projects, reduced growth investment, and more asset sales”, van Beurden said, which sounds good to me. He is effectively calling a halt to the company’s massive growth drive, and plans to cut last year’s £46 billion capital spend to around £37 billion. That looks like a prudent move, especially with the oil price expected to stay flat, or even fall to $80 a barrel, according to some analysts, on new production from Iran and Iraq, and US shale. Planned divestments of $15 billion worth of non-core and non-performing assets in the next two years should also boost returns.
3) By getting a re-rating
I hate overpaying for shares. It leaves you vulnerable for one bad set of results or a sudden shift in sentiment. If, like me, you like buying shares in the global companies that have underperformed the market, Shell looks tempting. Its share price has risen a paltry 4% in the last three years, against 10% for the FTSE 100 as a whole. Over five years, it is up 36%, again, trailing the FTSE’s 60% growth. That leaves Shell trading on a lowly forward price/earnings ratio of 9.9 times earnings for December, giving scope for a re-rating, assuming van Beurden does turn this tanker round.
4) Because growth is returning
Last year, Shell suffered an agonising 39% drop in earnings per share (EPS). It still has plenty of problems, with higher exploration expenses and lower volumes hitting its upstream business, weaker refining conditions doing further damage downsteam, continuing security worries in Nigeria, and the weakening Aussie dollar, which has hit earnings. If Shell was more surefooted, you would pay a much higher price for it. But the future looks brighter. EPS look set to rebound sharply in 2014, forecast to leap a mighty 42%. That won’t make you instantly rich, but it will help.
5) Simply by giving you cash
Shell has doling out money to investors. Last year, it handed out $5 billion in share buybacks and distributed more than $11.3 billion of dividends. It has just announced that it expects to pay a Q1 dividend of $0.47 a share, up more than 4%. Shell is on a forecast yield of 5% for December, making it one of the highest yielding stocks on the FTSE 100. Where else can you get income like that?
