By Peter Stephens – Monday, 6 June, 2016
With the price of oil having risen from $28 per barrel earlier this year to around $50 per barrel, many investors may feel as though the worst is now over. Certainly, such a rapid gain in the price of any asset indicates a step change in investor sentiment and looking ahead, the price of oil could rise yet further. However, with there being a major imbalance between the supply of and demand for oil, its price could easily come under further pressure in the short-to-medium term.
In such a situation, it may be prudent for investors to hold shares in oil stocks with sound financial backgrounds. One such company is Shell (LSE: RDSB), with it having a strong balance sheet and excellent cash flow. In fact, evidence of Shell’s financial strength can be seen in its acquisition of BG Group during the oil crisis. This indicates that Shell is very confident in its ability to survive a low-oil-price environment. And with it having a debt-to-equity ratio of just 41% even after the acquisition of BG, it seems capable of making further acquisitions in future.
Long-term view
Clearly, such a strategy is relatively risky. The price of oil could fall further and cause high quality assets to trade at even more appealing prices. However, Shell seems to be taking a long-term view on the price of oil, with it having the potential to rise due to increasing demand from the emerging world in future years. And with Shell cutting back on exploration and investment spending, it seems to be conserving cash where possible to ensure its survival even if the oil price undergoes a renewed fall in the coming months and years.
Of course, Shell remains a relatively volatile stock to own. Its profitability is highly dependent on the price of oil and so its share price could continue to trade within a wide range. However, this risk appears to be adequately priced-in to the company’s current valuation. For example, Shell trades on a forward price-to-earnings (P/E) ratio of just 12.8 and this indicates that it offers a wide margin of safety for long-term investors. And with Shell having a yield of 7.5%, which is due to be covered fully by earnings next year, it remains a sound income play too.
Coping with volatility
In terms of survival during the current oil crisis, Shell’s diversity, balance sheet strength and impressive cash flow mean that it’s likely to outlast the vast majority of its sector peers. This means that in the long run its position relative to industry rivals could improve, since Shell may be able to increase its market share and improve on its profitability. As such, while survival may be key for now, in the long term Shell seems to offer high potential returns for investors who can live with above average volatility.
Of course, Shell isn’t the only company that could be worth buying at the present time. With that in mind, the analysts at The Motley Fool have written a free and without obligation guide called 5 Shares You Can Retire On.
Peter Stephens owns shares of Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
This website and sisters royaldutchshellplc.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.
Royal Dutch Shell conspired directly with Hitler, financed the Nazi Party, was anti-Semitic and sold out its own Dutch Jewish employees to the Nazis. Shell had a close relationship with the Nazis during and after the reign of Sir Henri Deterding, an ardent Nazi, and the founder and decades long leader of the Royal Dutch Shell Group. His burial ceremony, which had all the trappings of a state funeral, was held at his private estate in Mecklenburg, Germany. The spectacle (photographs below) included a funeral procession led by a horse drawn funeral hearse with senior Nazis officials and senior Royal Dutch Shell directors in attendance, Nazi salutes at the graveside, swastika banners on display and wreaths and personal tributes from Adolf Hitler and Reichsmarschall, Hermann Goring. Deterding was an honored associate and supporter of Hitler and a personal friend of Goring.
Deterding was the guest of Hitler during a four day summit meeting at Berchtesgaden. Sir Henri and Hitler both had ambitions on Russian oil fields. Only an honored personal guest would be rewarded with a private four day meeting at Hitler’s mountain top retreat.
IN JULY 2007, MR BILL CAMPBELL (ABOVE, A RETIRED GROUP AUDITOR OF SHELL INTERNATIONAL SENT AN EMAIL TO EVERY UK MP AND MEMBER OF THE HOUSE OF LORDS: 
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A head-cut image of Alfred Donovan (now deceased) appears courtesy of The Wall Street Journal.
