Stock of the week: Royal Dutch Shell
After a disappointing first half 2016, the latest Q3 results were encouraging as the company reported a 25% increase in production compared to the same period last year. Most of the positive news came from the group’s focus on lowering costs and reducing capital expenditure. Investors should appreciate that earnings excluding identified items were up 18% to $2.7bn.
In recent years the company has been going through some major capital investment programmes, which should lead to cost efficiencies, increased production capacity and higher cash flows. However, the lower oil price environment has led the company to reign back on major investment programs. There have been huge asset write-downs and interested investors should note that the company is considering job cuts. However, while the company’s upstream business is suffering from lower oil prices, downstream parts of the business such as refining are doing better and helping to mitigate the earnings fall.
We would recommend Royal Dutch Shell as a ‘buy’ for the contrarian investor looking to benefit from a longer term recovery in the oil price. The income is attractive, but investors should be aware that there is a possibility of the dividends being cut if oil prices pull back down. We therefore view that the riskiness of the business has gone up to a medium level. Investors would be best advised to drip feed into the stock in the current climate. It’s also worth noting that UK investors should buy the -B- shares as they are not liable to Dutch tax.
Helal Miah is investment research analyst at The Share Centre