Why Royal Dutch Shell Is The Best Energy Stock For New Investors

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About: Royal Dutch Shell plc (RDS.A), RDS.B, Includes: XOM
by: Gaurav Agnihotri
Summary

Last year, Royal Dutch Shell surpassed Exxon Mobil as the world’s largest oil and gas company.

Shell's overall performance is no longer dependent only on oil prices and its volatility.

Shell has succeeded in diversifying its energy business.

Just like its other energy rivals, Royal Dutch Shell (RDS.A) (RDS.B) announced its fourth quarter 2018 results on January 31st, 2019. The energy giant announced a full-year earnings of $21.4 billion, with a massive year-on-year growth of 36% which was the company’s highest since 2014. I strongly believe that Royal Dutch Shell is the best energy stock that new investors can buy at the moment.

Last year, Royal Dutch Shell had surpassed Exxon Mobil (NYSE:XOM) as the world’s largest oil and gas company in terms of sales, profits, assets and market value. Investors must note that the company’s year-on-year income had grown by a massive 279% in 2017. Although this massive growth was largely attributed to high oil and natural gas prices, Shell reported an income of $23.3 billion in 2018 when oil prices fell notably during its last quarter. A year-on- year income growth of 80% in 2018 is commendable to say the least.

Image Source : Fourth Quarter 2018 results

Shell’s 4Q18 earnings showcase its strength

In the last few years, Shell has made some strategic moves that has positioned it as an energy major that is ready to embrace a volatile business environment. The merger with BG Group was one such move that made Shell the largest liquefied natural gas producer in the world.

Although oil prices fell by more than 40% during the fourth quarter of 2018, Shell's 4Q18 earnings increased from $4.3 billion in 4Q17 to $5.7 billion. The integrated gas earnings (supported by higher natural gas prices) went up from $1.6 billion in 4Q17 to $2.4 billion in 4Q18. The upstream earnings also went up from $1.7 billion in 4Q17 to $1.9 billion in 4Q18.

Image Source: Fourth Quarter 2018 results

Image Source: Fourth Quarter 2018 results

Cash flow from operations increased from $9.1 billion in 4Q17 to $12.9 billion in 4Q18. Being an ‘Integrated Energy Company’, Shell’s fourth quarter results indicate that the company’s overall performance is no longer dependent only on oil prices and its volatility. Royal Dutch Shell has proved that it has the ability deliver strong and better than expected numbers even when oil prices are on a decline.

How is Shell different from Exxon?

It is interesting to compare Shell’s fourth-quarter results with another energy giant Exxon Mobil. Investors must note that Exxon Mobil’s fourth-quarter results were supported by its rising upstream volumes, with its total 4Q18 earnings pegged at $6 billion. However, its downstream earnings fell from $1.27 billion in 4Q17 to $0.73 billion in 4Q18. On the other hand, Shell’s downstream earnings increased from $1.4 billion to $2.1 billion during the same period.

The fundamental difference between Shell and Exxon is their dependency on oil prices. Just when Shell succeeded in diversifying its energy business by focusing on its ‘Integrated Gas Division’ and ‘New Energies Business’, Exxon Mobil is focusing majorly on investments aimed at increasing its oil production. Exxon Mobil’s ‘aggressive growth plan’ is a testimony to this fact. Therefore, in my opinion, XOM is more sensitive to oil price movements than Shell. But, this does not mean that XOM is not a good investment option. I firmly believe that Exxon Mobil’s growth strategy and financial numbers will support its stock price in long term.

Conclusion

Image Source: Fourth Quarter 2018 results

It won’t be wrong to state that Royal Dutch Shell has consistently improved its year-on-year cash flows since last few years. For 2018, the company reported a free cash flow of $39 billion. Investors must also note that the company’s free cash flow increased significantly during the fourth quarter of 2018, when oil prices were falling. Besides, the company has been paying a generous dividend which is currently yielding around 5.82%. Finally, with its $25 billion share buyback program, Shell is easily the best long-term energy stock that new investors can buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.