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Royal Dutch Shell: There's Only One Royalty In Oil, And You'd Best Not Buy It On The NYSE.

|About: American Shared Hospital Services (AMS), Includes: BP, CVX, MRO, PPCGF, USD, XOM


Royal Dutch Shell has outperformed XOM and CVX for a decade, yet is undervalued.

Profit from rising oil with lower downward risk.

Get a better dividend yield or lesser stock volatility compared to the US RDS.B.

Save up those ForEx dividends and get out when the dollar dips.

True royalty is in blood, and in this case in oil also. I make a case for not just buying Royal Dutch Shell, but also for buying it on the London Stock Exchange or Amsterdam Exchange rather than on the New York Stock exchange.

Why invest in the black goo?
Since the EIA predicts higher oil prices on both the short and longer term, oil is currently undervalued. At least, if you're in it for the long haul. The same goes by the way for LNG, which has also hit historic lows, but looks to be catching up again. Investing in oil (or gas) itself through futures however, is tricky. Even more so when contango arises. An ETF might be the answer, but best case scenario you'll just keep up with the market. Investing in a solid oil company has, in my view, a smaller downside risk and bigger upside gain. Especially since stock prices have managed to stay afloat nicely in spite of oil dropping like an anvil.

Why Shell? Why not a small E&P or XOM or some other?
I can't really predict when oil or gas will rise, so the small E&P's are quite possibly broke long before the prices go up. Of course, I have some small positions in companies like Marathon Oil (NYSE:MRO) and President Energy (OTC:PPCGF) to have a real explosion in worth when prices rise, but I wouldn't bet all I have on them.
So why Shell and not British Petroleum (NYSE:BP), Chevron (NYSE:CVX), Exxon (NYSE:XOM) or even Gazprom (GAZP)? Shell has not only solid fundamentals, and quite possibly some not yet discovered upside (see below when comparing it to XOM and CVX), but through exchange selection you might even outpace yourself if you're already in RDS on the NYSE.
Shell is placed at the Amsterdam Exchange (NYSEMKT:AMS), London Stock Exchange (NYSE:LSE), and New York Stock Exchange (NYSE), which makes might make hedging currency possible as well as attractive. Another reason I like RDS is that I fully acknowledge that I might be wrong. And for now, RDS is the only company which is actively diversifying beyond up- and downstream oil (through buying British Gas for instance). So if I'm wrong and oil stays down, I should still be safe and my investment will likely outperform the oil only companies.

Why buy on a non-US stock exchange?
Firstly, the US dollar (NYSEARCA:USD) is noted very high at the moment. Compared to the British pound (GBP) it's almost at a 10 year high (see graph 1). Also note that historically only 5 (!) times since 1953 the USD/GBP has been this high or higher. Compared to the Euro (EUR) the USD exchange rate is breaking all the records (graph 2).

Graph 1: USD vs GBP over a ten year time span. From:

Graph 2: USD vs EUR over a ten year time span. From:

I don't believe for a second such records will hold forever, and think you'll be hard pressed to find anyone that does.
Now I realize looking back is no guarantee for future developments, but these exchange rates are mental in a historic perspective. And then the question becomes if the circumstances offer good enough reason for rates being where they are. In my opinion they don't: there's hardly any fundamental change. Executive summary: I think the dollar is overvalued from a historic perspective.
Secondly I would ask you to consider what happens when the FED hikes interest rates. In effect saving becomes more interesting, thus there'll likely be a capital drain from the US markets thus lowering the stock values. For the sake of honesty, I don't think the drain would be massive with a small hike. But it might still hurt. So for now I reckon the EU has a more stable outlook with Draghi promising to continue as planned. Executive summary: I think the dollar is overvalued taking into account the FED's plans.
In short I feel hedging your dollars through buying solid stocks in EUR or GBP now could be a very profitable move, regardless of stock. Even so, I think RDS deserves special attention.

Comparing RDS to the competition
Royal Dutch Shell is a rock solid performer, and quite possibly poised to outperform CVX and XOM whether oil goes up or down. Have a look at the following comparisons:

All information contained in the graphs above comes from

RDS.B Price to Book Value Chart

RDS.B Price to Book Value data by YCharts

I doubt I need say more, but I will: RDS outperformed both XOM and CVX for the better part of last decade. Most notably is the FCF where RDS got hit hardest in 2009, and yet now it's back at the starting point, where XOM is left with only half of the historic FCF. CVX, well, better not even go there.
I would also draw your attention to the last graph which is telling also. It shows both XOM and CVX are valued higher to book than RDS, so RDS seems both safer and the better performer compared to XOM and CVX. This combination is rare, and poises RDS to outperform both in bull and bear market. All that it takes really is for the competition to degrade. And looking at the historic FCF developments, it seems the competition is well underway to make it so.

Comparing RDS.B to itself
So, RDS.B looks better because of outperforming the competition, whilst more conservatively valued. But how does RDS.B compare to itself? Is the stock performing differently on the three exchanges? Or, more to the point: is there additional gain to be made by simply trading the very same stock elsewhere? Let's find out. Have a look at graph 4:

Graph 4: Each stock valuation was compared to the previous quarter, yielding only dynamic difference.

You can see the differently placed stocks looking to behave rather similar, except for after 14Q2. Right there the US:RDS.B drops, and stays lower for longer than both the British and Dutch bought RDS.B stock. A minus 42% difference compared to NL:RDS.B follows at the end of 15Q1 as shown in the graph 6. This seems to stem from just 14Q2, so I'd venture it's just a one time market correction, which should not effect future stock movements.

Graph 5: the indexed stock prices. Each stock has been indexed with regard to its price on 10Q1.

It has been pointed out to me this seems like it is in direct contrast with my previous argument, that hedging now would benefit you if the USD were to drop. It wouldn't make sense now to invest if a rising USD made for a more expensive stock elsewhere, and a declining USD would leave the overseas stock valued lower, would it? Have a look at graph 6.

Graph 6: shown are the same stock price shifts as shown in graph 4, but now compounded with the ForEx relative shifts. With the US:RDSB the ForEx is nil of course, so the US:RDSB line is exactly the same as in graph 4.

Since stock price movements have been corrected for ForEx influence, all that rests is true movement. Or at least as close to true as I can get it as RDS has some FX hedges internally just as well. The observation however is remarkable: each stock behaves incredibly similar to the other variants. So hedging RDS.B for ForEx insurance through just stock change does seem rather pointless: e.g. when the dollar goes up 7%, the stock goes up by 7%. This doesn't hold perfectly because of imperfect markets, no set ForEx triade, etc, but it's close to perfect. So you could profit from some ForEx inefficiency, but there probably won't be too much of it to be profitable on its own.

So why if not for (just) currency?
One important reason I would consider hedging for at least the short term is the FED going to push interest rates before the ECB will. This could very well act as a near term catalyst for the NYSE.RDS.B to go down as capital exits the American stock market. You might want to hold out just a tad longer to see how the Greek issue pans out once more, or wait for the British elections, but I seriously doubt this creating any real turmoil: I don't see either one really leaving the EU.
Another reason to go abroad are the dividends. The European dividend yields are somewhat better than in the US.

Graph 7: dividends indexed in relation to their respective stock price.

Now the data in graph 7 may look like just a very small outperformance, but the cumulative Dutch RDS.B dividend was 7% higher than the US dividend (a free 1.4% bonus y/y!). The London based dividend was also higher, albeit it a smaller difference of just under 3% in total.
Lastly I would point you back to the rather significant graph 5, in which it is clear that the Amsterdam notated RDS.B almost continuously outperforms both the LSE and NYSE RDS.B variants. If you like stability above all else (e.g. possibly in need soon to liquidate) the most stable option you have is RDS.B on the LSE. The relative standard deviations are NYSE: 0.15, AMS: 0,18 and LSE 0,09 (nearly half that of the NYSE!). If you wish to trade RDS.B, AMS is your best bet historically speaking.

I think you're better of buying RDS on the LSE or AMS than on your own NYSE. Doing it for the dividends? The AMS has historically outperformed the RDS.B on the NYSE. Combine that with a real chance of the dollar going down, and holding on to those euro dividends might just give you an extra edge.
If you love stability over everything else, perhaps if you might need to liquidate in the near future, the London Stock Exchange is your place to be. The standard deviation of stock movements is ridiculously low, and yet it still offers a slightly better dividend than the NYSE.RDS.B.
So regardless of your preference of stability or yield, I'd buy in Europe.

All stock data was imported from RDS through:

The ForEx rates were taken from:

Data analysis was done through Open Office.

Disclosure: The author is long RDS.A, MRO, PPCGF.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My RDS.A long position is on the Dutch AEX index. My position in President Energy is on the London Stock Exchange. My MRO position is listed on the NYSE as indicated through SA.