With a barrel of Brent crude hovering around the $77 mark, energy companies are now much better placed than when oil crashed below $30 in January 2016, causing disarray across the industry.
Dutch courage
Companies like oil and gas giant Royal Dutch Shell (LSE: RDSB) worked hard to protect their profits and maintain their dividends during the slump, and I see them now reaping the benefits of all that cost-cutting and offloading of non-core assets.
In 2016, revenues dipped to $233bn, roughly half the $451bn it generated three years earlier. They rose to $305bn last year and although this remains a far cry from black gold’s glory years this must be set against Shell’s lower cost base given recent disposals and cost cutting.
Peak demand
In the short term, nobody knows where oil will go next. The current Saudi Arabia crisis briefly threatened a spike, as did President Trump’s stand-off with Iran, but both threats have abated for now. That said, in the longer run it is probably wise to assume that the oil price will fall, along with demand, as producers face a long-term threat in the regulatory response to climate change.
As a £205bn behemoth employing 90,000 people in more than 70 countries and with a carbon footprint only slightly smaller than Germany’s, Shell is on the frontline of this shift.
CEO Ben van Burden is trying to rebalance the business to meet the threat posed by wind and solar growth, and the drive towards electric cars. He is desperate to avoid ending up with billions in ‘stranded assets’ and is only holding on to oil where it can make a profit at $40 a barrel. Shell recently offloaded its dirty Canadian oil-sands assets for $7.25bn and dumped $1.9bn of Danish oil assets as part of its wider $30bn divestment and simplification programme.
Our friend electric
Shell is also moving into alternative energies, building an offshore wind farm in the North Sea, installing solar farms in Oman and California and installing hydrogen fuelling stations across Germany. It has also bought Netherlands-based electric vehicle charging network NewMotion, and UK electricity supplier First Utility, albeit with mixed fortunes so far. Some of these bets will pay off, others may not.
Despite all this uncertainty, oil makes up more than 80% of the global energy mix and is still a big money spinner. Shell’s earnings rose from $3.6bn to to $4.7bn in the three months to 30 June, although that was below analysts’ average estimate of $5.97bn. It has also announced a $25 billion share buyback programme between now and 2020, subject to debt reduction and oil prices.
High energy
This suggests to me that Shell’s forecast 5.8% yield is safe and this gives you six-and-a-half times the 0.88% yield on the average cash ISA. Shell is of course riskier than cash, but on the other hand, I think it also offers greater capital growth opportunities in the long run.
If you are investing for at least five years and preferably 10 or longer, I feel Shell is likely to prove the far more rewarding use for your money. However, there are even juicier yields out there with some FTSE 100 stocks yielding more than 8%.