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Royal Dutch Shell (RDS.A) Is Just Killing It

Investors rejoice; Shell's buyout of BG is only the beginning

Sometimes, things just seem work out for some people or stocks. European integrated giant Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) is currently one of those stocks. After struggling under the weight of falling products and few ambitious projects, RDS seems to have gotten its mojo back.

Royal Dutch Shell NYSE:RDS.A NYSE:RDS.B

And that mojo keeps on growing. Its latest government approval will have RDS investors smiling for years to come.

All in all, Shell could be the one big oil stock to put in your portfolio for the long haul.

For RDS, the beginning of its transition to being arguably one of the best super majors is its transformative deal to buy BG Group plc (ADR) (OTCMKTS:BRGYY). By snagging up BG for a cool $70 billion, Shell will now be the leader in liquefied natural gas (LNG) exports and imports.

Shell is already the leading producer of LNG in the world and actually developed the technology for the world’s first commercial LNG plant more than 50 years ago. In addition to being a huge natural gas producer, BG has become a major logistics play on the fuel source. The former “British Gas” has all the complex infrastructure needed to compress, ship and re-gasify LNG, including terminals and pipelines to specialized tankers and regasification import facilities.

The combo has everything RDS needs to increase its dominance in LNG over the longer term. And that dominating force will yield instant cost savings and synergies of about $2.5 billion per year and produce cash flows of $15 billion to $20 billion by 2020 as LNG takes off in places like Asia and Latin America.

And that eye towards energy-thirsty Asia is exactly what Shell’s latest big win plays into.

In 2012, RDS stopped all work in Alaska’s Arctic seas as its main drilling rig was lost and damaged. Since then, Shell has been under some major scrutiny from the regulators and environmentalists about restarting and continuing its drilling programs in the Chukchi Sea.

While the Sierra Club may still object, the Bureau of Ocean Energy Management (BOEM) gave the go-ahead after a multi-year review of the plans. Initially, Shell will drill six wells in about 140 feet of water in the Chukchi Sea.

While RDS still needs approval from the state of Alaska — which has pretty much said “do it” — the major hurdle for the energy producer has been crossed. That gives Shell a huge advantage in the Alaska’s Arctic seas.

Both ConocoPhillips (NYSE:COP) and Statoil ASA (ADR) (NYSE:STO) own drilling leases in the Chukchi and Beaufort seas. However, neither COP nor STO have any drilling plans in place.

That’s big for RDS as the U.S. Geological Survey estimates that Alaska’s offshore Arctic seas could hold a 26 billion barrels of recoverable oil and 130 trillion cubic feet of natural gas. Getting out there first gives RDS a dominant position in Arctic oil and natural gas.

And when you consider how close those reserves are to Asia, Shell will be in the driving seat when — not if — the U.S. opens oil exports.

Time To Buy RDS Stock

For investors, the time to bet big on Shell and RDS stock could be now.

The BG acquisition increases Shell’s proven oil and gas reserves by roughly 20%. The technology and infrastructure gained from the purchase can then be applied to its efforts in the Chukchi Sea. It’s a win-win for the long term and could be a win-win for investors as well.

Cash flows from both projects as well as any bolt-on acquisitions Shell is planning on doing in North America will ultimately power future dividends and buybacks at the firm.

As for buying RDS stock today, Shell is still pretty cheap. Shares can be had for a price-to-earnings ratio of 13, and investors are rewarded with a big 5.9% dividend yield. That P/E ratio might seem like a bigger bargain in the long run as it fully absorbs BG.

For Royal Dutch Shell, the firm’s latest approval for drilling in the Arctic is just another big win with regards to its turnaround. RDS seems to have finally turned a corner and that makes shares a big buy for investors.

As of this writing Aaron Levitt did not hold a position in any of the aforementioned securities.

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