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Royal Dutch Shell plc (RDS.A) looks a solid bet for energy investors now, based on strong fundamentals and compelling business prospects.
Its position as a significant supplier of liquefied natural gas should further boost its long-term cash flow growth owing to attractive potential. Also, the integrated energy behemoth with a market capitalization of $156.6 billion is making solid progress toward the transition to a renewable energy-focused future.
Therefore, if you are still contemplating how to capitalize on this stock price rally, it’s time that you tap the invest opportunity at your disposal.
The currently Zacks Rank #2 (Buy) stock has surged 55.9% in the past year compared with the industry’s growth of 48.1%. The stock also comfortably outpaced the Oils-Energy sector’s rise of 42.8% and the S&P 500’s growth of 36.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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What Makes It a Promising Pick?
Stellar Q2 Performance
Shell delivered better-than-expected second-quarter 2021 earnings, attributable to stronger commodity price realizations.
The company reported earnings of $1.42 per share, outpacing the Zacks Consensus Estimate of $1.31.
Northward Estimate Revisions
The direction of estimate revisions serves as a key indicator when it comes to stock price performance. The Zacks Consensus Estimate for Shell’s third-quarter 2021 earnings has been revised 16.8% upward over the past 60 days. Earnings estimates for 2021 have moved 8.6% north during the same period.
Positive Earnings Surprise History
This Hague, The Netherlands-based company has a decent surprise record. Its earnings surpassed the Zacks Consensus Estimate in three of the preceding four quarters and missed the mark on one occasion, the average beat being 117.76%.
Strong Balance Sheet
During the second quarter of 2021, Shell announced the launch of a $2-billion stock repurchase program to be completed by the end of 2021. This reflects the company’s steadily improving earnings and cash flows on the back of higher crude realizations and a recovery in consumption. The company's debt-to-capitalization as of the end of the second quarter was 27.7%, improving from 32.7% three months ago.
Factors Driving Growth
Shell became the world's largest liquefied natural gas (or LNG) producer as a result of the BG acquisition.
With LNG demand likely to rise significantly in the near-to-medium term on the back of strong consumption from the Asian importers like China, India, South Korea and Pakistan, Shell’s position as a major supplier of LNG should help the company meet the growing demand for fuel and aid its cash flow to improve.
Shell accumulated a huge amount of debt to fund the BG buyout. The company currently has more than $100 billion debt (including short-term debt). However, management is looking to drive down through extensive asset divestments.
Shell's green initiatives are still in the works. While it became the first oil company to link executive pay with carbon emissions for combating climate change, it has been on a renewable acquisition spree of late. Shell collaborated with IONITY, New Motion, First Utility and Silicon Ranch in a bid to diversify its portfolio beyond oil and gas.
The company's transactions with battery storage supplier sonnen and solar developer Cleantech further emphasize its increasing shift toward lower-carbon fuels. In addition, it expects its net carbon intensity to fall 6-8% in 2023 from the 2016 baseline. Further, the reduction will expand to 20% in 2030, 45% in 2035 and 100% by 2050.
Efforts Yielding Results
As a result of the oil price crash, Shell trimmed its 2020 capital expense by 28% from the year-ago reported figure. Over the last year, it has slashed operational expenses by another $3.5 billion. These cost-reduction measures helped Shell rake in a free cash flow of $20.8 billion even in a year as volatile as 2020.
The company followed it up with $17.4 billion in free cash flow during the first half of 2021. Moreover, its current ratio of 1.32 is quite healthy and is supported by $42.9 billion in cash and cash equivalents. Moody's gave the firm an investment grade rating of Aa2, which equates to low borrowing costs.
Other Key Picks
Some other top-ranked players in the energy space are Devon Energy Corporation DVN, Cabot Oil & Gas Corporation COG and Continental Resources, Inc. CLR, each presently flaunting a Zacks Rank #1.
Devon Energy is likely to see earnings growth of 9.32% in 2021.
Cabot Oil & Gas is projected to observe earnings growth of 218.52% in 2021.
Continental is expected to witness earnings growth of 435.9% in 2021.
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Devon Energy Corporation (DVN) : Free Stock Analysis Report
Cabot Oil & Gas Corporation (COG) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Continental Resources, Inc. (CLR) : Free Stock Analysis Report
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