Shares in Royal Dutch Shell (LSE: RDSB) have bounced back strongly from lows in 2016, with the share price having soared more than 50% over the past 16 months. Although the gain in the company’s market value has been mainly attributed to the remarkable recovery in oil prices, Shell has also made steady progress with lowering its break-even price point and integrating its acquisition of BG Group over the past year or so.
Since the start of the year, Shell’s shares have fallen back from a peak of just over £24 a share, as the price of Brent crude oil slipped to below $50 a barrel. However, given that the recent sell-off has been mainly driven by technical reasons, could this be our last chance to buy Shell for under £22 before its shares resume their upward trajectory?
Earnings recovery
Shell’s recent first quarter results seems to show that the oil giant has made great progress after a difficult few years. Reported earnings, on a cost of supplies basis, more than tripled to $3.38bn, a big improvement on the $814m figure from the same period last year.
Free cash flow, an arguably more important financial indicator than earnings for income investors, also looks promising. The measure of how much cash the company has left over after capital expenditures exceeded the amount required to cover dividend payments for the third consecutive quarter.
Shell’s net debt also appeared to have peaked, with net debt falling to $72bn in March, from $73.3bn at the end of 2016. Looking ahead, further progress seems likely as nearly $25bn of its planned $30bn asset disposal programme is underway.
Renewed slump
Going forward, a renewed slump in oil prices could undermine Shell’s $30bn asset disposal plan and its dividend sustainability. After all, the firm’s organic cash flow break-even price point with Brent crude is still somewhat above $50 per barrel and Shell still has some way to go with simplifying its portfolio and lowering costs.
However, on a more positive note, most analysts see technicals rather than fundamentals as the driver of the recent oil price sell-off. This should mean prices won’t stay subdued for long, as fundamentals remain largely unchanged. Looking ahead, many analysts see a broadly positive outlook for oil as increased consumer demand and OPEC supply cuts will likely bring the oil market closer to balance in the medium term.
Progress
Investors should also be pleased with Shell’s progress on what it can directly control. The oil giant has made significant steps to lower its cost base and is on schedule to make savings of $4.5bn from its merger with BG. And looking ahead, Shell plans more asset sales and cost cuts over the next few years as the energy giant adjusts to lower-for-longer oil prices.
Moreover, City analysts expect Shell to continue to deliver earnings growth in the medium term. In 2017, they expect the oil giant to generate adjusted earnings of 136.5p a share, which gives it a reasonable forward P/E of 14.8. And with shares yielding almost 7%, I expect Shell has plenty more upside — that is unless oil falls significantly below $50 a barrel for a sustained period.