Royal Dutch: Conservative Play on Energy

01/26/2015 8:00 am EST


George Putnam

Editor, The Turnaround Letter

We are pretty certain that the price of oil will rebound from its current low levels, but we have no idea when; this leads us to believe that this is a good time to invest in an oil stock, but to do so in a conservative way, suggests George Putnam, editor The Turnaound Letter.

Royal Dutch Shell plc (RDS-B)—which traces its roots back to the 1830s—fits the bill perfectly. The company boasts a rock-solid balance sheet and pays a generous dividend.

Royal Dutch’s business is well diversified in several different ways, which helps to reduce the risk in the stock.  On the production side, the company has good assets in most of the major oil producing regions around the globe. 

On the revenue side, the business is well diversified geographically, with 39% of 2013 sales in Europe, 35% in Asia, Africa, and Oceania, and 26% in the Americas. 

Moreover, the company makes money from a number of different lines of business beyond exploration and production, including oil transportation and refining, retail gasoline distribution, and chemical production.

The company embarked on a restructuring program a couple of years ago that is focused on improving operational efficiency to squeeze more out of its existing assets, improving organizational efficiency to reduce costs and divesting underperforming assets. 

Because this restructuring program is well underway, Royal Dutch is now in a better position than many of its competitors to deal with low oil prices.

The company’s balance sheet and cash flow are both very strong. Royal Dutch recently had $19 billion in cash and a relatively low level of debt. 

It appears to be committed to returning cash to shareholders, mainly through dividends but also through stock buybacks.  As a result, the stock carries a generous dividend providing a decent return even if oil prices stay low for some time. 

Interestingly, the CEO, who took the helm early in 2014, underscored the shareholder focus by requiring top management to own significant multiples of their salaries in company stock.

We believe that the decline in Royal Dutch’s stock price over the last six months provides a great opportunity to add a first class company in an important sector to your portfolio. 

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