(Editor’s Note: This story was corrected to reflect Band’s ownership of RDS.B shares)
With oil prices hovering around 11-year lows, and natural gas prices recently touching 14-year lows, it may seem a bit crazy to talk about Royal Dutch Shell (RDS.B). But, it’s not crazy. It’s contrarian.
When extremes show up in the marketplace, your first reaction should not be panic, but a cool, calm search for opportunities that have been churned up in the tumult. If there’s any sector that has seen turbulence in recent quarters, it’s the energy patch.
Oil prices are off around 60% in the past year alone and hang at decade lows. The same goes for natural gas. “Upstream” exploration and production (E&P) companies are withering. “Midstream” pipeline companies, which are more a play on demand than supply, are being hammered since demand can’t keep up with supply at this point. And, “downstream” players like refiners and retail outlets are hurting since they need demand to slightly outpace supply, and that isn’t in the cards right now.
Diversification and Expansion Efforts Will Benefit Shell Stock
Big integrated oil companies like RDS.B that have operations across the entire sector have diversified so they don’t take a direct hit from any one sector, but that hasn’t helped in the current situation. In the latest quarter, RDS.B reported a $6 billion loss. The stock is now off 33% year to date.
But, RDS.B has begun to transition.
If growth doesn’t exist in the marketplace, smart companies look to grow their book by other means, e.g., mergers and acquisitions. RDS.B has just received the green light by most major governments for its merger with BG, what was formerly known as British Gas.
The company predicts the merger will add $3.5 billion in pre-tax synergies to its bottom line. By synergies, that usually means the elimination of redundant positions between Shell’s gas operations and BG’s existing operations. The number of layoffs has been put at 2,800.
Restructuring for RDS.B
RDS.B has already cut its workforce by 7,500 this year, pulled out of expensive E&P operations in Alaska and Canada, is looking to cut operations in New Zealand and the UK, and is hoping to sell off properties that aren’t worth the effort.
The point is, RDS.B is already moving quickly to restructure itself for the new reality of lower oil and gas prices. It’s not simply trying to wait it out or engage in high-risk strategies.
This is what smacks of opportunity. Shell stock looks pretty darn close to a bottom here. It certainly has far more upside than downside.
Yes, the stock is off big, but the reality is that its retooling will help turn the ship. Plus, a decent quarter above analysts’ current dour expectations could see the stock move back up briskly.
What’s more, Shell stock is throwing off an eye-popping 8.4% dividend yield. That means if the stock goes nowhere from now to next December, you still get an 8.4% return.
The point is, the current risk-reward ratio is leaning in strong favor of taking a position in this energy giant. If you’re cautious, buy in slowly over the next few months. If you’re bold, take your stake now; in the long run, this will be close to decade lows for the stock.
As of this writing, Richard Band was long RDS.B shares.
