Donald Trump’s views on climate change may provide a boost to oil production in the US. He stated in his campaign that the US was being disadvantaged by rules and regulations aimed to prevent (or at least slow down) climate change. This could signal a more positive attitude from the US government towards oil and gas companies over the medium term.
Although there’s no certainty that Trump will follow through on his campaign policies when he becomes President, it seems likely that he’ll be less positive about battling the effects of climate change than Barack Obama. This could be bad news for Shell (LSE: RDSB).
While looser regulations may sound like a good thing for oil and gas producers, it could mean that the current imbalance between supply and demand worsens. Already there’s a surplus of supply in global oil markets and even if OPEC cuts production, it will still leave demand short of supply until well into 2017. More relaxed regulations in the US could lead to higher domestic production, which may hurt the oil price over the medium term.
Prepare for volatility
Since Shell’s financial performance is closely linked to the price of oil, it could lead to a more challenging period than anticipated for the company. This could mean a cut in Shell’s guidance, which may cause a decline in its share price in the short run. As such, long-term investors should be prepared for volatility as well as the prospect of paper losses in the near future.
However, for those with plenty of patience, Shell has stunning growth potential. Key to its performance beyond 2017 will be the integration of the acquired BG assets. Thus far, this process is going as planned and it has the potential to lift Shell’s free cash flow to over $20bn per annum by 2020. When you consider that its free cash flow was just $3.7bn last year, this shows that its financial performance could be set to improve drastically.
Furthermore, Shell’s price-to-book (P/B) ratio of 1.4 indicates that it offers good value for money. It shows that even if the oil price falls, Shell’s share price may not come under as much pressure as other, more expensive oil and gas companies. Shell’s wide margin of safety could also equate to long-term capital gain prospects. When combined with its yield of 7.2%, this indicates that Shell’s long-term total return will be significant.
In the short run, Shell’s share price could fall if Donald Trump’s apparent distaste for current climate change policies leads to higher oil production in the US. However, with the potential for higher free cash flow resulting from the successful integration of the BG assets, as well as a wide margin of safety and high yield, Shell remains a strong buy for those taking a long view.
