Here’s why I’d buy the undervalued Shell share price and 6% yield

Harvey Jones thinks you can’t ignore the yield on offer from Royal Dutch Shell plc Class B (LON: RDSB).

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Oil rig

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The oil price is rising again, judging by my recent trip to the filling station, and what’s bad news for motorists is good news for investors in oil and gas stocks.

Ticking over

FTSE 100 behemoths such as Royal Dutch Shell (LSE: RDSB) have delivered patchy share price growth lately, in fact Shell’s stock is at similar levels to five years ago. However, such firms will keep your portfolio’s engine running with generous dividends, in this particular case paying around 6% a year.

However, some of you will prefer to head for the wilder fringes of the industry in search of far juicier returns from the likes of Gulf Keystone Petroleum (LSE: GKP), the oil and gas exploration and production company focused on the Kurdistan region of Iraq, which has published its full-year 2018 results today.

Uplift

Its share price has flatlined for the last three years and is down 4% today, a judgement that seems harsh as it posted “record profit after tax and declaration of first dividend on strong financial performance“. The group also said it is on track for a “material uplift in production” to 55,000 barrels of oil per day in the first quarter, as production picks up.

Gulf Keystone posted record revenue, up 45% to $250.6m. It also posted $79.9m profit after tax, a substantial increase on $14.1m in 2017. The group had a year-end cash balance of $295.6m, up from $160.5m. It completed a $100m refinancing last July and says under current assumptions, all phases of its low-cost onshore Shaikan expansion programme are fully funded.

Dividends too

Management is now planning to pay $25m in ordinary dividends this year and “given its current financial strength”, the board is proposing to complement this with a $25m supplemental dividend.

The group’s share price has picked up this year, but clearly investors wanted more. Companies like this will always be risky, and City analyst reckons earnings per share could fall 26% this year, before rebounding by a mighty 126% in 2020. Gulf Keystone Petroleum looks promising for those with strong nerves, trading at 10.8 times forward earnings, while Alan Oscroft claims it could be the oil stock bargain of the decade.

Sure of this one

If that’s too wild and woolly for you, there’s always Shell. A massive £90bn giant with a finger in almost every energy pie (from renewable to shale), it showed its mettle during the recent oil price slump by continuing to pay its dividends.

Cost-cutting has whittled down its break-even oil price to $50 a barrel and it could go even lower, which means the cash should be flowing with the price now at $66. The other big threat to profits is the shift to renewables, but Shell is looking to head that off by investing billions in the new energy sector and has ambitions to become the world’s largest electricity supplier by the 2030s.

A global slowdown or recession would hurt, but at least you aren’t overpaying for its stock at 11.7 times forward earnings. Earnings per share could drop 4% this year but jump 18% next, and in the meantime there’s that yield. Currently a forecast 6%, with cover of 1.4. I reckon almost every portfolio should have a splash of Shell.

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 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.

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