Royal Dutch Shell (NYSE: RDS)
have produced only meager returns for investors in recent years,
but all that may be changing.
That's thanks to an ambitious growth plan that may boostcash
flow by 50% and allow Shell to generate more than $175 billion of
cash flow during the next three years. By buying shares now,
investors can take advantage of the upcoming cash flow bonanza
while collecting a 5%dividend .
At a current price-to-earnings (P/E ) ratio of 8, Shell --
Europe's largest oil company and the third largest globally
Exxon Mobil (
-- is priced at a nearly 25% discount to its five-year median P/E
of 10.5 and 20% below its industry peers. Shell's price-to-cash
flow ratio is only 5, which values the company at 35% less than
A few years ago, Shell beganinvesting heavily in
infrastructure, natural gas and shale resource plays. More than
30 projects are in development. Together, these represent more
than 7 billion barrels of new gas or oil.
Shell has made key acquisitions in major resource plays such
as the Eagle Ford Shale in South Texas and the Marcellus Shale.
Last September, the company spent $1.9 billion to purchase
Permian Basin properties in West Texas from
Chesapeake Energy (
that more than triple the company's shale oil production.
In the next five years, Shell anticipates tenfold growth in
its shale oil production, to more than 250,000 barrels a day.
Unlike deepwater oil and gas, shale resources can be developed
quickly, which is great news for oil giants such as Shell in the
race to find new reserves.
Shell plans to spend $6 billion on its worldwide shale
operations thisyear . The company has roughly 3 million acres of
oil-rich shale formations in North America and is also drilling
shale in the Middle East and Russia.
More than any of its rivals, Shell has made biginvestments in
natural gas and liquefied natural gas (
). The company has already invested more than $40 billion in LNG
production facilities and controls 7% of the world LNG business.
Shell plans to more than double its LNG share through development
LNG is the fastest-growing fuel, with annual demand forecast
to double in 10 years to 500 million tons, the equivalent of 4.5
billion barrels of oil. Demand is rising because natural gas is
abundant, relatively cheap and burns much cleaner than either
coal or oil.
Three months ago, Shell added 7.2 million tons annually to
LNGvolume by purchasing the LNG business of Spanish company
Repsol for $6.7 billion. Last month, Shell scored a coup when it
was chosen to partner with the Abu Dhabi National Oil Co. to
develop the prolific Bab Field gas reservoirs. The Bab Field,
once developed,will produce 500 million to 800 million cubic feet
of gas per day.
Shell's large natural-gas holdings were a drag onearnings last
year when crude oil prices hit record highs, but in March 2012,
natural-gas prices plummeted to a 10-year low. Natural gas makes
up 54% of the company's reserves and more than half of annual
However, with natural-gas prices finally turning around and
hitting multi-month highs, Shell may finally begin reaping the
benefits of its investments.
The company's earnings improved 3% in the first quarter from a
year earlier, to $7.5 billion, and Shell also increased its
dividend by 5% to an annualized rate of $1.80.Analysts think the
company can deliver annual earnings growth of 4% to 6% in the
next five years.
Cash flow, a better measure of financial strength, came in at
$11.6 billion during this year's first quarter, up 17 % from the
previous quarter. In the past 12 months, Shell has generated more
than $49 billion of cash flow, including $13 billion offree cash
flow . After spending $10 billion for dividends and share
repurchases, the company was left with acash surplus of $3
The company'sbalance sheet is strong, showing $17.6 billion of
cash anddebt of $36 billion, which represents only 15% of
After maintaining its dividend at $1.68 a share during the
global downturn, Shell increased payments 2.4% last year and 4.7%
in the first quarter of this year. The modest 34% payout leaves
plenty of room for dividend growth, and Shell also plans to spend
$4 billion to $5 billion on share repurchases this year, which
will enhance earnings per share andbook value .
Risks to Consider:
Royal Dutch behaves like U.S.-traded companies by paying
quarterly dividends (most European firms pay semiannually or
annually. Shell has both Class A andClass B shares , the only
difference being that Class B shares aren't required to withhold
a 15% Dutch tax on dividends. U.S. investors can recover
foreigntaxes paid onClass A shares through annual tax filings
with theIRS . However, there is no such recovery if shares are
held in a tax-deferred account, so the Class B shares are a
better choice for anIRA .
Action to Take -->
All oil and gas companies win as energy prices rise, but none
more so than Shell due to its huge exposure to natural gas. In
the meantime, investors get paid a generous 5% dividend that
looks very secure.