When it comes to investing in stocks, there is absolutely no question about one sector that you must have as a core holding: energy stocks. I don’t care what people say about “peak oil”. For anyone who thinks that solar and wind and alternatives are going to supplant energy stocks in any way, ask them why these choices have existed for decades yet make up less than 1% of the energy produced. The answer is simple: they don’t make money and energy stocks make tons of money.
When I launch The Liberty Portfolio in January, one of my early picks will involve some form of fossil fuels. I haven’t decided yet if I’ll go with a sector exchange-traded fund or an individual stock. However, were I to choose right now, I’d go with Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B).
Why Royal Dutch Shell Is My Choice Among Energy Stocks
It’s a tough choice and, frankly, most of the big oil producers would do just fine. However, RDS.A stock has been making some interesting moves of late, and it has gone from a company where I was concerned about the dividend, to one that seems poised to rebound sharply as oil prices recover.
Instead of cutting the dividend as I feared, RDS.A surprised me by cutting back on spending and selling off some businesses that weren’t generating attractive returns. It also announced earlier this year that it would continue to sell off assets as well as trim spending.
One of the issues that has arisen in energy stocks over the past decade or so is that the big producers don’t stuff their profits back into their businesses when times are good and oil prices are high. Instead, they feel the need to elbow aside competitors and get into fistfights over drilling in new areas.
Another problem is that they have to compete with government-owned oil companies, which effectively have endless capital that doesn’t require them to show profits, either. Thus, returns on invested capital actually fall during boom times.
Conversely, and surprisingly, when oil prices are low and profits get squeezed, the oil producers suddenly realize they had better get a bit more disciplined with their capital!
Now, RDS.A has a CEO with over 30 years of experience with the company and who used to run the refining operations. He made a rather bold move by buying up British Gas, which has tons of natural gas assets. Royal Dutch Shell has great infrastructure, so the combination made a lot of sense. In fact, RDS.A is pushing production more and more to natural gas to the point where it is now the largest natural gas producer.
Bottom Line on RDS.A Stock
As far as the RDS.A stock financials go, capex has fallen from nearly $60 billion in 2013 to about half that amount anticipated for next year. Operating expenses were trimmed from about $45 billion to about $40 billion. In recent years, Royal Dutch Shell struggled to put out about $5 billion in free cash flow each year. But by 2019, RDS.A expects it to top $20 billion.
That takes us to the dividend of $3.76 per share of Royal Dutch Shell stock, which equates to about 7%. That’s pretty amazing for a big oil producer. With RDS.A stock at $53, there appears to be skepticism that the company will deliver on its plan. I think it will, so you’ll enjoy capital gains along with that dividend that will outperform the sector.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.