Time for This UK Stock to Motor?

04/12/2013 7:00 am EST


A look at a downtrodden London-traded supermajor brings up some pros and cons for Harvey Jones of The Motley Fool UK.

When I invested in Royal Dutch Shell (London: RDSB or NYSE: RDS-B) three years ago, I was sure I was onto a gusher.

With oil trading at comfortably over $100 a barrel, emerging markets getting thirstier by the day and new sources of energy hard to access, this oil and gas big boy seemed a no-brainer. Thanks to its generous 5% yield, Shell was one stock I fully expected to retire on.

So what went wrong? Shell's share price has barely shifted in the last two years, while the FTSE-100 rose 8% in that time. Yet I reckon the market has been a little harsh on Shell, which reported a fourth-quarter 2012 profit of $5.6 billion, up 15% on the year, thanks to strong performance in its refining and marketing divisions.

Management was upbeat about the future, and boosted the quarterly dividend by 4.7%, but it wasn't enough. The market had expected more. Shell stalled.

Shale and Hearty
These are hardly car crash figures. Production rose 3.3% to £3.41 million of oil or natural gas equivalents per day, with new projects in Qatar and Australia offsetting falls elsewhere.

Shell is investing in 30 new projects that should boost production to 4 million barrels of oil equivalent a day by 2017 or 2018. With up to £130 billion in the capital spending budget, it is investing heavily in its future.

This is a company that throws off bills, generating $46 billion of cash flow in 2012. It is also getting stuck into the task of exploiting China's potentially vast shale oil reserves, after signing a production-sharing contract with China National Petroleum Corporation. New markets, new profits.

Double Dutch
Shell has its problems. The oil price is volatile, and new sources such as oil sands are expensive to extract. Gas prices have plummeted thanks to US shale discoveries, hitting its struggling US upstream business.
Brokers have lost their enthusiasm. UBS recently downgraded Shell to "neutral," blaming a lack of near-term momentum, and held its target price at £23.

I will definitely continue to hold Shell. That 5.1% yield, covered 2.5 times, is reason enough to be loyal. The question is, should I top up my tank?

The recent bull run has left many of my favorite shares looking fully valued, but I don't have that problem with Shell, which trades at just 7.7 times earnings. Even BP (BP) trades at 11.7 times earnings, while BG Group (London: BG) is even more expensive at around 13 times earnings, despite its lowly 1.5% yield, and recent admission that it won't grow at all in 2013. On that basis, Shell looks cheap.

Earnings per share growth isn't as juicy, with Shell on course for a 4% drop in 2013 and a meager 2% rise in 2014. The market isn't fooled—it knows Shell has a long and winding road ahead of it. But for the long-term investor, recent sluggish performance makes now a tempting time to hop on board.

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