5 Sep

Shell Stock Near Its 52-Week Low: Right Time to Invest?

WRITTEN BY Maitali Ramkumar

Royal Dutch Shell (RDS.A) (RDS.B) is trading near its 52-week low. Shell stock has fallen sharply in the third quarter to $55.80, close to its 52-week low of $54.90.

Since July 1, Shell stock has declined 14.1%. Shell stock has been hit by lower earnings, weaker markets, and lower oil prices. However, Shell’s lower stock price should be reviewed to screen it as an investment option.

Shell Stock Near Its 52-Week Low: Right Time to Invest?

Shell’s peers ExxonMobil (XOM), Chevron (CVX), and BP (BP) have fallen 9.6%, 5.8%, and 10.5%, respectively, since July 1. Total SA (TOT) and Suncor Energy’s (SU) stock prices declined 10.5% and 6.9%, respectively.

Shell stock: Lower earnings but with a silver lining

Shell’s reported earnings dropped almost 50% YoY to $3.0 billion in the second quarter. Also, Shell’s adjusted earnings slumped 26% YoY to $3.5 billion, the lowest since Q1 2017.

Shell’s earnings fell in its Upstream, Downstream, and Integrated Gas segments in the second quarter. The main reason for this performance was a decrease in oil, LNG (liquefied natural gas), and natural gas prices. Also, refining and chemical margins fell in the quarter. The company undertook both planned and unplanned maintenance projects, which impacted its overall operations.

Shell faced cyclical conditions that coincided with its high-maintenance activities period. However, such situations may not be repeated every time. Shell is on the path of focusing on strong financials and growth.

In the second quarter, Shell optimized its capital spending, exited non-strategic assets or positions, lowered its operating costs, and increased its cash flows by delivering new projects. By taking these measures, Shell strengthened its financials by repaying some portion of its debt, paying dividends, and buying back shares in the second quarter.

Shell’s robust upstream portfolio

Shell has several projects in various phases of development that are expected to bring in growth in production, earnings, and cash flow to the company until 2020. Wall Street analysts expect Shell’s earnings to rise 22% in 2020.

Shell expects its main projects to contribute more than 250,000 boepd (barrels of oil equivalent per day) of net new production in 2019–2020. The company expects the projects that are scheduled to start in 2021 and beyond to add another 300,000 boepd of new production net to the company. Shell has numerous projects in the pre-FID phase, which the company expects to deliver more than 1 million boepd of new production.

In the second quarter, Shell’s hydrocarbon production rose 4.1% YoY to 3.58 million boepd. Also, Shell started production at its mega project Appomattox ahead of schedule and 40% under budget. Shell expects the project to produce 175,000 boepd of hydrocarbons.

Shell dispatched its first LNG shipment from its Prelude FLNG project. The company made the final investment decision to go ahead with Mero 2 FPSO (floating production, storage, and offloading) vessel in Brazil. Further, Shell restructured its portfolio with the sale of a 22.5% stake in the Caesar Tonga asset to Equinor (EQNR) for $965 million.

Shell stock’s high dividend yield

In the third quarter, Shell plans to pay a dividend of $0.94 per ADS on September 23. Shell’s dividend payment has stayed flat YoY in the quarter.

However, Shell’s dividend yield stands at 6.7%, the best among peers. ExxonMobil, Chevron, and BP’s yields stand at 5.0%, 4.1%, and 6.6%, respectively. Total and Suncor’s yields stand at 5.8% and 4.3%.

Shell announced the next tranche of its share buyback program. Shell expects to buy a maximum of $2.75 billion in shares until October 28. In the previous tranches, Shell repurchased $9.25 billion in shares between July 26, 2018, and July 29, 2019. Shell intends to repurchase $25 billion shares until the end of 2020.

Reasonable valuation

Shell trades at a forward PE of 9.8x, below its peer average of 12.1x. ExxonMobil, Chevron, and Suncor trade at high forward PE multiples of 16.2x, 14.8x, and 12.1x, respectively. Shell (RDS.A) currently trades at a forward EV-to-EBITDA multiple of 4.7x, below the peer average of 5.4x.

Conclusion

In our view, Shell stock looks attractive at this level. Although the company is facing severe business conditions, it is strengthening its financials and following its growth trajectory. Plus, the stock trades at a reasonable valuation and offers a high dividend yield.

To learn more on an investment opportunity in energy stocks, please read ExxonMobil or Chevron: Which Is the Better Buy?

Market Realist analyst Maitali Ramkumar holds no position in Shell stock.

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