Why I’d invest £2,000 in Royal Dutch Shell plc and this ‘secret growth stock’

Harvey Jones says Royal Dutch Shell plc (LON: RDSB) and this recovering oil explorer could make a great combined play.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the price of crude pushing $70 a barrel, oil investors are enjoying some much-needed respite. The price could go higher still, especially if Donald Trump’s appointment of foreign policy hawk John Bolton signals a tougher line on Iran, which could hit supply. Here are two very different ways to play black gold’s recovery.

Prince Caspian

London-listed Nostrum Oil & Gas (LSE: NOG) is an independent multi-field oil and gas company operating in the pre-Caspian Basin, with operations in Kazakhstan. This morning it issued its full-year figures for the year to 31 December, and the stock has crept up 0.48% as a result. However, it still trades 25% lower than 12 months ago, after suffering operational struggles over the last year.

2017 revenues grew 16.5% to $406m year-on-year, while EBITDA grew almost 20% to $232m, with margins climbing 150 basis points to 57.2%. The downside is that net operating cash flow slumped from $202 to $183m, while net debt increased from $858m to $961m. Average daily sales volumes dipped to 37,844 barrels of oil equivalent per day, down from 39,043 in 2016.

Challenging times

CEO Kai-Uwe Kessel admitted that 2017 was a challenging year operationally for the £573m company, with a delay to the completion of its GTU3 project and some disappointing results from “watered out” wells, which knocked 3.1% off sales volumes. However, positive results suggest it may have more reserves than thought in a new northern area in the Chinarevskoye field.

Nostrum successfully refinanced all of its debt due in 2019, taking advantage of lower oil prices to reduce the cost, and now has no maturities until 2022. My Foolish colleague Peter Stephens recently noted that it offers a potentially high level of capital return. City analysts are forecasting 651% growth in earnings per share (EPS) this year, and another 110% in 2018. That should reduce its valuation to just nine times earnings.

Out of its Shell

Nostrum is worth further examination and here is a more mainstream way to play the oil price recovery, this time with a juicy dividend. Last month, oil major Royal Dutch Shell (LSE: RBS) reported that its profits more than doubled in the fourth quarter, due to higher oil prices and increased efficiency, yet its investors are currently in a bit of a sulk.

The stock has actually fallen by around 9% over the past three months after Q4 cash flow weakened. This hit hopes that Shell will further increase its dividend to offset the damage done by last November’s decision to scrap its scrip dividend, which paid investors in shares.

Dividend delight

Another concern is that management will focus on paying down debt, rather than rewarding shareholders. However, this may help to build long-term sustainability, and Shell certainly deserves applause for maintaining its dividend throughout the oil price slump, amid constant speculation that its proud post-war record of continuously rewarding investors would finally fall. The forecast yield is still an impressive 6%, covered 1.3 times, which is nothing to grumble about.

Shell’s EPS are forecast to grow 53% in 2018 and 9% in 2019, while the stock trades at a forecast valuation of just 13.1 times earnings. The recent dip looks like an excellent entry point to me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »