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Royal Dutch Shell plc (ADR) (RDS.B) Is Loaded With Upside and Yield

RDS.B might be one of the best value/dividend combos in the entire market

The collapse of the global oil market has created a number of buying opportunities among oil and gas stocks. Now that the worst of the downturn has come and gone, investors have one last chance to buy value dividend stock Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) on the dip.

Royal Dutch Shell Stock (RDS.B) Is Loaded With Upside and YieldIt’s certainly unusual to call a stock that is currently generating negative net income a value stock. However, most stocks don’t have cash flows and profits tied so closely to the price of a commodity like oil.

Like many oil and gas stocks, if crude oil prices stay below $50/bbl, RDS.B stock will struggle to make significant headway. But assuming oil prices continue a steady long-term rise, Royal Dutch Shell is sitting in an ideal position.

In the years leading up to the collapse of the oil market, RDS.B spent heavily on exploration and production projects. In addition, the company recently closed a massive $50 billion buyout of BG Group plc (ADR) (OTCMKTS:BRGYY).

The buyout certainly stretched Royal Dutch Shell’s balance sheet thinner than shareholders would ever want to see it stretched. However, if oil prices recover, RDS.B’s aggressive buying will work wonders for its cash flow for years to come.

RDS.B Is a Hidden Value Stock

Royal Dutch Shell’s new game plan is selling off non-core assets, cutting costs as much as possible and attempting to stay afloat. Management is prioritizing spending until the crude oil market is more cooperative. The company now says its priorities will be debt reduction, dividends, capital investments and share buybacks.

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The following Bloomberg graph shows just how much Shell’s net debt has ballooned in 2016. Yet, so far, the company has opted not to cut the dividend.

In fact, Shell hasn’t cut its dividend in 70 years. That fact is a good indication of how committed management is to maintaining the dividend.

In June, CEO Ben van Beurden provided an update on this strategy.

“By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions, we can reshape Shell into a more focused and more resilient company, with better returns and growing free cash flow per share,” van Beurden explained.

Of course, these projections assume at least $60/bbl crude oil prices in the long-term.

Wall Street’s Take on Shell Stock

The company and its shareholders are understandably optimistic, but what do industry experts think of Shell stock? Just this week, Argus analyst Bill Selesky reiterated his “Buy” rating of RDS.B. He expects RDS.B stock to outperform Energy sector peers and the S&P 500 in coming quarters.

The ratings agencies aren’t particularly concerned about Shell’s large debt load. Shell debt is still rated A/stable by Standard & Poor’s, Aa2/negative by Moody’s and AA-/negative by Fitch — all investment grade.

However, Raymond James analyst Jean-Pierre Dmirdjian believes Royal Dutch Shell’s balance sheet could actually get worse before it gets better. Earlier this month, Dmirdjian questioned Shell’s ability to grow its free cash flow and continue to pay its dividend in the current “unsupportive oil price environment.”

If Bank of America’s projections are correct, RDS.B could morph into one of the best long-term value stocks in the market by the middle of next year. Analyst Savita Subramanian is “Overweight” energy stocks and believes crude oil will hit $69/bbl by summer 2017.

It seems clear that if oil prices rise, RDS.B stock could easily be one of the best value/dividend combos in the market.

However, crude oil has proven to be volatile and unpredictable in the last two years. The market doesn’t seem to trust RDS.B stock just yet. But the window to buy the dip in Shell stock before the market re-gains its confidence may be closing.

As of this writing, Wayne Duggan was long RDS.B.

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