Today I am outlining why Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) could be considered a terrific stock for growth hunters.
Streamlining plan delivers the goods
The consequences of a volatile oil price have caused Shell’s earnings to shake wildly in recent years, and the firm has clocked up losses in three of the past five years, culminating in a huge 39% dip last year.
In a bid to stave off further bottom line pressure — not to mention bulk up the balance sheet — Shell remains engaged in a multi-year cost-cutting and asset-shedding scheme to develop only the most profitable of its upstream and downstream assets. This helped to drive earnings on a current cost of supplies basis more than double to $5.1bn during April-June alone.
And although total capital expenditure is likely to register at much lower levels for some time to come, Shell has shown that it is not afraid to splash the cash to develop what it considers high-growth assers — indeed, the business commenced production at its Cardamom offshore facility just this week, the second gigantic project it has brought online in the Gulf of Mexico in 2014.
Fortune favours the brave?
In light of this action, City analysts expect Shell to punch earnings growth of 40% this year, to 230.6p per share, and a more modest 2% improvement predicted for 2015 to 235.7p.
This year’s projection creates a P/E multiple of 11 time prospective earnings, just outside bargain terrain of 10 or below but which smashes a forward average of 21.9 for the complete oil and gas producers sector. And Shell’s ratio slips to just 10.8 for 2015.
Of course investing in oil is a high-risk decision. Earnings can often take a huge whack as uncertainties associated with the exploration and production process can make the timing and quantity of potential payloads nigh-on impossible to estimate. Meanwhile the prospect of boatloads of new capacity hitting the market in coming years — particularly from the US shale sector — threatens to significantly depress the oil price.
But for risk-tolerant investors Shell’s turnaround strategy could pay off handsomely should exploration activity impress. Meanwhile, as Islamist rebels continue their march across the oil-rich hotbed of the Middle East, and the possibility of further economic sanctions on Russia over the Ukraine crisis persists, the black gold price — and consequently Shell’s earnings outlook — could receive a further boot in the right direction.