Share tip of the week: oil firm will benefit from nuclear fallout
By
Tim Price Apr 04, 2011
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The impact from the earthquake and tsunami that battered Japan three weeks ago is still working its way through financial markets. With luck, the situation at the stricken Fukushima nuclear plant will soon be resolved. But the aftermath of its radioactive leakage is likely to leave a lasting imprint on the energy sector.
European countries including Germany and Poland were quick to announce reviews of their nuclear strategies. China, which is currently building 27 nuclear reactors, said it would immediately suspend its approval process for new construction, pending a safety review. The world has been chronically underinvested in energy infrastructure for some time. And the impact of Fukushima on the nuclear industry will exacerbate things.
Big Oil for one seems certain to be a key beneficiary. In Britain, they don't come much bigger than Royal Dutch Shell.
Peter Voser, chief executive of the Anglo-Dutch giant, laid out his stall for ambitious production targets last month, announcing plans for $100bn of investments in new projects, in regions including Qatar and Canada. Voser also pledged to boost oil production by 12% from 2010 levels, which would make Shell one of the largest listed oil producers.
In response to events in Japan, he confirmed that Shell was in discussions with the Japanese government about providing cargos of liquefied natural gas (LNG), and that its three refineries in Japan were again operating normally.
As the company points out, macroeconomic conditions currently favour the business, and I expect this to continue well into the future. Crude oil prices are buoyant. Oil by-products and chemical margins are in good shape, and emerging market – particularly Asian – growth is boosting energy demand.
Share tip of the week: Royal Dutch Shell (LSE: RDSB), rated a BUY by Liberum Capital
To meet that surging global demand, all sorts of natural resources will be required to plug the gap, and the problems overhanging Fukushima are likely to mean that oil and gas benefit to a greater degree, given the uncertainty and risks now associated with nuclear energy.
It is too early to say how events in north Africa and the Middle East will affect the oil market, but it's plausible that, given the macro backdrop, oil's medium-to-long-term outlook is pretty secure. It's hard to believe that only a year ago the industry was agonising over the long-term impact of the Gulf of Mexico oil spill.
If 2010 is any guide, Shell is in rude health. Earnings for the year were up by 61% from 2009 levels, to $20.5bn, and earnings per share grew by 90%. Cash flow from operating activities was 40% higher. While oil and gas production volumes rose by 5%, sales volumes of LNG, a more environmentally friendly fuel, grew by 25%.
Shell's declared dividends for 2010 totalled $10.2bn – the biggest in the sector. In an almost 0% cash world, that dividend income is doubly valuable, with Shell's 12-month net dividend yield standing at 4.75%. Its current price/earnings multiple (p/e), according to Bloomberg, is just under 11, and its forward p/e is nine, which looks very undemanding to me (the FTSE 100 is trading on a current and forward p/e of 14.5 and 10.5 respectively). Fifteen City firms have the stock as a 'buy'; five as a 'hold'; and only Arbuthnot Securities rates it an outright 'sell'.
In the interests of full disclosure, I own shares in Royal Dutch Shell both in a personal capacity and on behalf of clients.
Recommendation: BUY at £22.53
• Tim Price is director of investments at PFP Wealth Management. He edits
The Price Report newsletter
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