It is almost the new year and this is the time to take a look at next year's favorite stock picks. I would like to share my favorite oil and gas pick for 2014. Royal Dutch Shell (RDS.A, RDS.B) is my favorite major oil and gas pick for next year. Shell's main competitors in the major oil and gas industry include Exxon Mobil (XOM), Chevron Corporation (CVX) and ConocoPhillips (COP). Royal Dutch Shell is part of my portfolio for some time now and there is a fair chance that I will increase my holdings next year. My bullish outlook for Shell was confirmed by several published news items this month. This article argues that Royal Dutch Shell is the best major oil and gas pick for 2014, based on financial data and non-financial arguments.
It is important for me that companies are transparent and honest about the possible threats to its business. Shell's management is quite open and transparent in the company's investment strategy. For example: the Wall Street Journal released this news item on December 5, 2013. In this news item, the company stated that it abandoned a multi billion-dollar LNG project in Louisiana. The company abandoned this project, because the capital expenditure forecast increased by 60% in during the last three months. Shell could not justify the additional project cost, given the uncertainty of the energy prices in the future.
Also, Shell will make important steps with the divestment of non-core assets and low profitable projects, according to the oil and gas analysts from J.P. Morgan Cazenove. In this article I argued that Shell will divest several assets next year and that the company remains on track to realize the mid-term financial targets. My conclusion was:
The mid-term financial targets support the dividend payments in the future. I expect that Shell will achieve these financials targets, because of the company's proven track record and the precautionary measures. This proves that the company recognizes that some projects are not as profitable as expected. Shell will divest these assets and reinvest the funds in more promising projects.
The oil and gas analysts from J.P. Morgan Cazenove stated that Shell will divest $30 billion of its assets, including the $7 billion stake in Woodside Petroleum (OTCPK:WOPEF, OTCPK:WOPEY) and the $2 billion stake in Nigerian assets. The stake in Woodside Petroleum is considered a non-core asset for some time and it is no surprise that Shell considered selling the stake. It is also a good development that Shell is considering selling their Nigerian assets, because the oil theft in the region cost the company a lot of money. I agree with one of the comments on my previous article regarding the Nigerian problems. The comment stated: "If the problem is unfixable, sell and leave."
Shell is a very innovative company. The company is the first major oil and gas company to invest in floating LNG technology. Shell's floating LNG project is also knows as the 'Prelude Project.' The new technology enables Shell to save up to 30% of the initial capital expenditure This is a great competitive advantage in the development of off-shore natural gas fields, according to this article. Chevron Corporation recently stated that the company is not considering the technology, because there are too many unanswered questions. Exxon Mobil is reconsidering the floating LNG technology as well. I am confident that Shell's management will make the Prelude project a success. As a result, Shell will have a great competitive advantage over the other major oil and gas companies.
This article provides several non-financial arguments to support my statement that Shell is my favorite oil and gas pick for 2014. The financials should not be overlooked though. The graphs above show the trailing P/E ratio and dividend yield for Shell and the three major oil and gas competitors in the United States. The trailing P/E ratio is important to determine whether Shell is undervalued, equally valued or overvalued compared to the three major competitors. The dividend yield is important, because large oil and gas stocks are important for dividend income investors. The graphs show that Shell's trailing P/E ratio is almost equal to the trailing P/E ratios of Chevron Corporation and ConocoPhillips. The trailing P/E ratio is considerably lower compared to Exxon Mobil. Further, Shell's dividend yield is the best yield among the four companies. Shell's dividend yield is 30% higher than the second highest dividend yield.
Shell is not overvalued and has the highest dividend yield compared to the competitors Exxon Mobil, Chevron Corporation and ConocoPhillips. This makes the stock attractive for dividend income investors. The investment and divestment strategy will strengthen the company's financial results, because the company divests the low profitable assets and reinvest the additional cash flow in more profitable projects (such as the Prelude floating LNG project). Further, the divestment of the Nigerian assets will have a positive effect on Shell's earnings in the upcoming years. The company lost a lot of money in Nigeria this year, because of oil theft. The problem will not occur any longer when Shell sells the assets.
As I stated in the introduction of the article, Shell is my favorite oil and gas pick for 2014. The company is a great dividend income investment and provides investors with a 5.1% dividend yield. The stock is not overvalued compared to the company's main competitors Exxon Mobil, Chevron Corporation and ConocoPhillips. Further, Shell will benefit from their profitable investment and divestment strategy. Shell invests in innovative technology, in contrast to Chevron Corporation and Exxon Mobil. This will provide the company with a great competitive advantage in the future, if the technology is a success. The investment in floating LNG is also a threat though, if the technology is not a success. However, I am confident that Shell's management will not disappoint the investors and make the floating LNG technology a success. Therefore, Shell is and will be present in my dividend portfolio.