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Why Royal Dutch Shell’s Value Increased by $10 Billion in October

Shell has had a great year, and October added to the up trend, even though there wasn’t much actual news.

Nov 6, 2017 at 4:32PM

What happened

Shares of Royal Dutch Shell plc (NYSE:RDS-B) rose 4.5% in October, which doesn’t sound like a huge amount until you consider it in dollar terms. That move is the equivalent of a $10 billion increase in the integrated oil major’s market cap. By comparison, competitor Chevron‘s stock fell more than 1% and ExxonMobil was up just 1.5% (or so) in the month. That, however, is the continuation of a trend, since Shell has been outperforming its peers all year long.

So what

The interesting thing is that there wasn’t much news to drive Shell’s performance last month. However, since around July and August, Shell has been on a tear. There are two parts to this solid showing. First, oil has been heading in a generally upward direction since about that point. Shell is a commodity company, so energy prices will be a big piece of the performance puzzle.

But second, and perhaps more important, Shell appears to be executing well. For example, it has made material headway on its debt reduction goals, which is being driven by asset sales. The oil major has also notably improved its return on capital employed, which has been hindered in recent years by high-profile misses like a now-curtailed effort to drill in the Arctic. The company also posted strong second-quarter earnings results, which fellow Fool Tyler Crowe described at the time as “turn[ing] on the cash flow tap.”

As Shell was set to report earnings in early November, and oil prices were heading higher throughput the month, investors likely bid the shares up in anticipation of good news. The oil giant lived up to expectations, by the way, reporting solid numbers on Nov. 2.

Now what

At the start of the year, Shell’s stock looked like it was a decent mix of value and yield. But the stock has had a good run so far in 2017. The yield is still enticing at around 5.7%, but Shell isn’t nearly as attractive in terms of valuation. That said, income investors still might be willing to pay a fair price for that hefty yield with Shell executing so well right now. Just don’t go in thinking you are getting a bargain simply because the yield is so high.

Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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