I have been very successful at contrarian investing, and in today’s market, that means there are few better places to look for contrarian opportunities than the energy patch.
But this is no time to start looking upstream for small exploration and production companies. Energy could prove the toughest sector moving forward if oil prices remain as low as they currently are; which is very likely, at least through the end of the year.
Refiners and other midstream players are interesting, but they usually take plants offline for maintenance after the summer driving season, which will add to oil reserves and slow their revenue.
This is the time to look for opportunity in big, diversified oil firms, and you could do a lot worse than to couch your money in Shell stock right now. In the current environment, energy stocks are the smart sector plays because their diversification cushions them from the pounding the market is giving to every other sector right now.
RDS.A Stock: The Worst Is Already Over
Let’s not mince words, there’s no doubt Big Oil stocks have lost a good deal of value this year, but the truth is, they’re still profitable and are actively paring back operations to maximize that profitability. Good news for contrarians: Oil stocks are bargains.
The point here is, there is much less downside than upside for these oil titans. It’s highly unlikely that oil will go much lower than it already has. If it does, there is much more to worry about than your entry price in a Big Oil trade. And even then, these are the kinds of firms that can survive an energy nuclear holocaust as well as a cockroach could.
On the upside, there are two sets of numbers that make the point for RDS.A very clearly: RDS.A is trading at a price-to-earnings ratio of 12.8, while the average P/E for the S&P 500 is 19.2. RDS.A’s current yield is nearly 7%, and the average yield in the S&P 500 is 2.2%. Looking at those numbers, Royal Dutch Shell stock is significantly cheaper than its peers and its yield is massively higher.
That yield, in fact, is a major factor in why RDS.A stock stands out in the energy sector. Even without any further growth, Shell’s yield still out performs most major U.S. averages this year. And moving forward, the improved breakeven margins for oil stocks means RDS.A stock will stop dropping, cost-cutting measures will bite the dust and the leak that is current losses will be plugged.
In that vein, new opportunities are strengthening the argument for Shell’s ability to turn loss into growth in coming quarters.
First, there is the new deal that allows U.S. oil companies to sell oil to Mexico, which is the first step in allowing the U.S. to export oil to other countries as well. The ability to export oil to other countries will certainly help upstream production firms get their oil to market, and it’s likely this will help those divisions in the big firms first.
This deal also means that U.S. firms will swap lighter, sweeter American crude for heavier Mexican crude, which helps U.S. refiners since they’re better equipped to refine heavy sour. The point is, big integrated oil firms can benefit from all aspects of this deal.
Another promising project that Royal Dutch Shell has announced is its liquefied natural gas plant in Eastern China with Guanghui Energy. Shell is already China’s leading LNG supplier, and this plant (as well as new regulation in China) will encourage smaller Chinese players to expand in the sector, while ultimately building Shell into a major player in the LNG infrastructure.
As for the recent award of an arctic drilling permit off of Alaska, there’s a bit more to it than you would get from the press reports. While it is a significant ruling, this isn’t a game changer in the near future.
The ruling allows for Shell to drill one well on a field — what energy insiders term an “elephant find” — that is thought to hold 4.3 billion barrels of oil up to a depth of 8,000 feet below the seabed. And drilling needs to be completed by the end of September, when the well will be capped as the ice moves back into the area.
The point is, this is going to be a very slow process. Most experts project that even if the initial well is successful, significant drilling in the area wouldn’t occur for another decade.
Bottom line: RDS.A has a lot of good news in both the short and long term; and now is the time to ignore the doom and gloomers and pick up a great stock with an excellent yield at a bargain price.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
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