Royal Dutch Shell An Interesting Buying Opportunity

Apr.30.12 | About: Royal Dutch (RDS.A)

In my article "Royal Dutch Shell Is Still A Buy," I already mentioned that companies such as Royal Dutch Shell (NYSE:RDS.A) still provide a downside hedge against future oil price weakness. In this context, the company provides an interesting combination of low valuation and high dividend yield.

Last Thursday, Royal Dutch Shell reported a 16% year-over-year increase to $7.3 billion in clean net profit (after inventory revaluations and exceptional items) for the first quarter of 2012. This number reflected a strong 15% in consensus expectations. Both divisions delivered better-than-expected Q1 results.

Net earnings in the upstream (exploration and production) unit jumped by 35% year over year as higher oil and gas prices (+15%) lifted profits (although realized natural gas prices fell 32% in the U.S.). Oil and gas production rose by 1.4% year over year (sequentially by 7.5%) to 3.55 mln boe/day (barrels of oil equivalent per day) and LNG volumes jumped by 17% year over year. Rising output from Pearl GTL and Qatar LNG more than offset asset disposals and natural field declines.

In the downstream (refining and marketing) unit, net earnings fell 32% year over year due to the decline in global refining margins and portfolio divestments. As previously announced by Royal Dutch Shell, the quarterly dividend was raised by 1 cent to $0.43 per share.

Final Note

Royal Dutch Shell delivered a strong Q1 profit beat based on solid results in both divisions. In addition, the strong 7.5% sequential production growth indicates that the company can deliver strong volume growth from its unconventional legacy projects (Qatar's LNG and Pearl GTL projects, as well as oil sands in Canada) this year. The stock has recently suffered for no particular reason.

The oil spill news in the Gulf of Mexico was not the trigger for the shift in investor sentiment. "Risk off" to "Risk on" trading could be the reason. As a result, Royal Dutch Shell's valuation (2013E P/E of 7.1) has now even fallen below the lower end of its long-term price/earnings valuation range (between 10 times and 7.6 times). It's clear that Royal Dutch Shell offers an interesting buying opportunity with a nice dividend yield (around 5%). Investors in the U.S. are better off with B-shares (NYSE:RDS.B), which have no tax witholding.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.