Shares of Royal Dutch Shell plc (RDS.A - Free Report) have returned more than 100% since the multi-year lows of 2016, standing out as one of the highest quality names in the integrated oil and gas universe. While shares have run up considerably and are just 10% off their 52-week highs, there is still time to add the stock to your portfolio as it looks promising and is poised to carry the momentum ahead.
The performance was supported by the company’s excellent earnings surprise history, having surpassed expectations in each of the trailing four quarters. Shell started 2018 on a solid note with the integrated behemoth's first-quarter upstream unit profit soaring from the year-ago period thanks to steady commodity price recovery. Shell's integrated gas business – consisting of the BG Group activities – also impressed on the back of pricing and production gains. Importantly, the Anglo-Dutch company's position as a major supplier of LNG should help cash flow to grow even further.
Not surprisingly, the stock is a huge draw among investors and is currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s take a look into the factors why this mega-cap company is one of the best bets in the industry.
Why Royal Dutch Shell is a Good Pick?
Impressive Stock Performance: Royal Dutch Shell has outperformed the industry over a year. The company’s shares have rallied 27.2% over this period compared with a roughly 18.6% rise recorded by the industry.
The BG Factor: In 2016, Royal Dutch Shell acquired the U.K.’s third-largest energy player BG Group for a total consideration of $50 billion. The company has made remarkable progress regarding the speed of its BG integration. Shell's integrated gas business – consisting of the BG Group activities – reported first-quarter adjusted income of $2,439 million, more than doubling from the $1,181 million in January-March quarter of 2017.
A Free Cash Flow Machine: For 2017, the Anglo-Dutch company generated an impressive $27.6 billion in free cash flows, the most by any supermajor. Moreover, Shell was comfortably able to cover its payouts with cash from operations - something that investors really want right now.
On Track with the Disinvestment Target: With the recently inked deals worth $1.3 billion, Shell is close to achieve its $30-billion multiyear divestment program to lower debt that shot up in the wake of BG acquisition. With Shell already wrapping up transactions worth $27 billion and having announced further asset disposals of around $2 billion, the company remains focused to meet its target by 2018.
Scrip Dividend Cancellation: Hit by the industry downturn, Shell began to pay dividend in the form of shares in 2015 to address cash flow woes. However, the supermajor finally aborted the two-and-a-half-year long scrip dividend program as cost-containment efforts and divestment strategies have paid off. The company’s solid results over the past few quarters also underscore the fact that it has successfully adapted itself to thrive at $50-barrel crude.
LNG Leadership: The BG acquisition also made Shell the largest liquefied natural gas (or LNG) producer in the world. With LNG demand likely to rise to around 500 million tons per annum by 2030 on the back of strong consumption from Asian importers like China, South Korea and India, Shell’s position as a major supplier of LNG should help the company meet the fuel’s growing demand and help cash flow to grow even further.
Robust Earnings Growth Expectations: The Zacks Consensus Estimate for earnings for second-quarter 2018 for Shell is currently pegged at $1.50, reflecting an expected year-over-year growth of 70.5%. Moreover, earnings are expected to register a staggering 51% growth in 2018.
Rising Earnings Estimates: Annual estimates for Shell have moved north over the past two months, reflecting analysts’ confidence on the stock. Over this period, the Zacks Consensus Estimate for 2018 has increased by around 16.5% to $5.80 per share. The Zacks Consensus Estimate for 2019 has also moved up 21.5% over the same timeframe to $6.27.
Style Scores: In addition to a top Zacks Rank, the stock’s Value, Growth and Momentum Scores are all A, giving the company a VGM Score of A.
Other Stocks to Consider
Apart from Shell, other oil and gas majors worth considering are Chevron Corporation (CVX - Free Report) , TOTAL S.A. (TOT - Free Report) and Eni SpA (E - Free Report) . While Chevron sports a Zacks Rank #1, TOTAL and Eni carry a Zacks Rank #2 (Buy).
Chevron is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. In the last 60 days, seven earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 33.1% in the same period.
TOTAL among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 8.4% in the same period.
Eni is engaged in oil and gas, electricity generation, petrochemicals, oilfield services and engineering industries. In the last 60 days, two earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings has risen 20.1% in the same period.
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