THE volatility that has been so prevalent in stock markets over the last six months or more has indiscriminately impacted share prices across the board.
But it’s during periods such as these – when investors throw out the baby with the bath water – that the best opportunities emerge to buy into the market’s best companies.
Currently, few stocks illustrate this as well as Royal Dutch Shell. It’s one of the largest companies in the world and active in every area of the oil and gas industry. Perhaps less well known is that it also has major renewable energy holdings, including biofuels, hydrogen, solar and wind power.
Interestingly, the company’s famous logo of a sea shell provides a clue to its origins. Originally, the father of the company’s founder who, like his son, was called Marcus Samuel, ran an import business selling seashells to London collectors.
When collecting specimens from the Caspian Sea in 1892, Samuel junior realised the potential to export lamp oil from the region and commissioned the world’s first purpose-built oil tanker. From such humble beginnings, the stock now commands a substantial weighting in the FTSE 100, with operations in over 90 countries. From our perspective, there are numerous good reasons for buying into the company at its current price. In the short-term, geopolitical risk in several important oil-producing areas remains extremely elevated. Iran continues to rattle its proverbial sabre, while sectarian violence is also on the rise again in Iraq This rising tension comes at a time when oil supply is already tight relative to demand.
Longer term, we see demand for fossil fuels remaining robust, even in the face of increased competition from renewables. If renewable energy resources develop faster than any previous energy source, they’re still unlikely to provide any more than 30% of global energy by 2050. At the same time, Asia, and especially China, has a long way to go before its per capita consumption of oil is anywhere near that of a country such as the US.
Due to its extensive global presence, Shell is also well diversified in terms of the potential economic, political and climatic risks associated with operating in a particular region. This has the added benefit of conferring plenty of potential new growth avenues on the business. Among its many operations, Shell has significant exposure to deep offshore projects, which are expected to provide the next generation of oil supply given the ongoing decline in conventional oil and gas resources.
Another compelling fact is that the group’s upstream oil (drilling and extraction) portfolio has a break even point of only $50 per barrel, which should maintain its impressive cash generation for years to come, helping to support both the 5% forecast dividend yield as well as further capital expenditure into new projects. Even without the potential for significant upside to the oil price and the share’s ability to act as a hedge against this, the fundamentals of the business are also very sound – especially considering the generous dividend on offer.
All the same, investors in any energy company should remember that they’re not defensive investments. BP’s oil spill in the Gulf of Mexico and the damage this did to its share price being a prime example. Shares can fall in value. Investors might get back less than they invested.
:: Andrew Miller is regional head of Barclays Wealth in Newcastle