Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Earnings keep sliding
The unpredictable nature of oil exploration means that earnings can often be erratic from quarter to quarter. But Shell has settled into a worrying pattern of continued pressure, as a combination of rising production and exploration costs and weak refining conditions — issues which are predicted to keep on rolling — crimped performance.
The company’s interims last month showed that earnings fell to $4.2bn during July-September, on a current cost of supplies (CCS) basis, down from $6.2bn in the corresponding 2012 period.
Project ramp-ups ready to blast
Still, the company’s huge capital expenditure programme looks set to drive earnings higher over the long term, and Shell notes that it has a “strong project flow in place for 2014 and beyond” ready to deliver huge returns.
The oil leviathan has gradually ramped up output across many of its assets in recent months. And although the firm is set to cut spending from next year onwards — indeed, Liberum Capital expects net capex of $45bn this year to drop to $35bn from 2014 onwards — Shell has a collection of giant earnings-driving projects set to deliver, such as the massive Stones deepwater facility in the Gulf of Mexico where installation is expected late 2014.
Nigeria continues to weigh
But for the time being, ongoing upheaval in Nigeria continues to cast a cloud on Shell’s production outlook. The firm noted in last month’s interims that group production slipped 2% on-year during the third quarter to 2.93 million barrels of oil equivalent per day (boepd), mainly due to problems in its African territory which affected volumes by 65,000 boepd.
The effect of widescale oil thefts from major pipelines in Nigeria is an escalating problem which neither the country’s authorities nor Shell has yet got to grips with. The firm is looking to scale back its operations in the country, but finding buyers for its assets at a respectable price will be a hard ask.
Dividends set to gush
Royal Dutch Shell is a long-standing favourite among investors seeking chunky investment income, and signs are that plump payments are set to keep moving higher. City analysts expect the firm to lift the full-year payout to 183 US cents per share in 2013, up 6.4% from last year, with a further 2.7% advance expected next year to 188 US cents.
If realised, these payments would provide bulky yields of 5.2% and 5.3% respectively, comfortably smashing the 3.2% forward averages for the FTSE 100 as well as the oil and gas producer sector.
A high risk, high reward stock selection
Of course, a backdrop of rising global energy demand as populations rapidly increase should bode well for Shell’s long-term growth prospects. But in the meantime, the effect of fluctuating oil prices, broad industry difficulties and problems in Nigeria could keep earnings under pressure. Although continued financial woes have shaken my faith in the company somewhat, for more risk-tolerant investors Shell could represent a great growth pick at a decent price.
