Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has been on a tear this year, climbing 10% while the FTSE 100 — in which Shell is the largest company — has slipped back 1% since January.
Interestingly, this means that Shell shares are now trading very close to their all-time high — so are they still a buy?
Face value
Current consensus forecasts suggest that Shell will report adjusted earnings per share of $3.65 this year, which equates to around 220p, placing the oil giant’s shares on a fairly modest 2014 forecast P/E of 11.5.
Similarly, Shell’s prospective yield of 4.5% should be enough to tempt most income seekers.
However, relying solely on analysts’ guesses for the year ahead is not a recipe for riches. In Shell’s case, I believe we need to look backwards in time, as well as forwards.
Rollercoaster ride
Anyone who has followed oil stocks for a few years will know that, despite their size and stable production, oil firms’ earnings per share can vary wildly, from one year to the next.
The price of oil, project timings and divestments can all make for surprisingly volatile earnings.
To see what I mean, take a look at Shell’s reported earnings per share over the last ten years:
| Year | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 |
| Reported earnings per share | $2.60 | $4.26 | $4.96 | $3.28 | $2.04 | $4.27 | $5.00 | $3.97 | $3.79 | $2.74 |
Source: Shell company accounts.
Shell’s earnings average out at $3.69 per share over the last ten years, which is broadly in-line with consensus forecasts for 2014 ($3.65) and 2015 ($3.72).
This gives Shell a PE10 (P/E using 10-year average eps) of around 11.5. The PE10 can be a useful guide to a company’s current valuation, and in Shell’s case, it suggests to me that the shares are valued about right — slightly below the FTSE average, reflecting Shell’s focus on dividend returns, rather than outright growth.
What’s next for Shell?
I have a suspicion that Shell’s earnings may peak in 2015 or 2016, and that today’s share price could look relatively expensive in a couple of years’ time.
Firstly, there’s no guarantee that $100+ oil will last forever. Secondly, Shell’s current $15bn divestment programme, which is proving very popular with investors, is due to complete in 2015.
Profits from divestments — such as the recent $5bn gain from the sale of shares in Australian firm Woodside Petroleum — will boost Shell’s reported earnings this year and next, but will drop out of the firm’s profits in 2016.
Shell’s 4.5% yield is enough to make it a sensible income buy, but I don’t think the firm’s share price is likely to rise much further, given its recent outperformance.