Shell share price forecast: is it still a ‘buy’ despite commodity slump and coronavirus effect?
15:23, 27 February 2020
The coronavirus outbreak and quarantine measures impede the economic activity in China and internationally, resulting in weaker demand for crude oil and gas. However, the European bank Berenberg remains confident in positive Royal Dutch Shell share price forecast, predicting a recovery in crude oil prices to $65 per barrel by 2021 and assuming that demand normalises.
Royal Dutch Shell is one of the top five oil and gas companies worldwide based on revenue, which operates in every segment of the oil and gas industry. According to Berenberg’s Shell share price prediction, it is still a ‘buy’, suggesting some 50 per cent upside from its current price of $47,24.
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Although Shell is exposed to Asian downstream and weak markets in liquefied natural gas, there is still attractive underlying cash flow growth, driven by low-cost upstream projects in Australia, Brazil, and the Gulf of Mexico. Provided that we see a normalisation of oil prices throughout the year, Royal Dutch Shell still has the opportunity to surprise investors positively.
Today, the company’s market cap is nearly $184 billion and its Enterprise Value (EV) is currently estimated at $276 billion. Looking forward to the Shell share price forecast, let us see whether it could bring us some exciting trading opportunities by the end of this year.
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Royal Dutch Shell stock analysis
The price of RDSA has been dropping throughout 2020 since its latest peak on January 06, when the stock was traded at $60.96. As of February 21, the stock closed the week at $49.17 which is a price 26.0 per cent lower than its 52-week high and only 0.8 per cent higher than the stock’s 52-week low.
This scenario has been primarily shaped by fears associated with the surge of coronavirus cases in and out of China, which are perceived as a potential risk for global economic growth.
The fact that China, a global economic powerhouse, has been deeply hit by the virus is perhaps the most influential element driving crude oil prices down with oil & gas stocks responding similarly.
On the other hand, climate change concerns recently voiced by many industry and world leaders have been affecting the stock, as the market is perceiving a potential shift away from fossil fuels as a response to this increasingly real threat.
Shell share price forecast: latest financial performance
Royal Dutch Shell (RDSA) reported Basic Earnings per Share of $1.97 on its latest full 2019 financial report, which represents a 30 per cent decline from 2018’s EPS of $2.82.
Revenues from core upstream and downstream operations were also down 11 per cent, mainly due to a 48 per cent decline in downstream revenues, while dividends per share were maintained at $1.88, which means that the company’s dividend yield is currently around 8 per cent.
In terms of its balance sheet, the company’s current ratio ended 2019 at 1.2, which is a bit lower than the 2018 ratio of 1.25, and the company’s long-term debt has also surged even though its sales have dropped.
By the end of 2019, long term commitments totalled $134,249 which results in an LTD-to-Assets ratio of 33 per cent. This means a 4 per cent increase from 2018 in a year where the company’s activities have actually slowed down.
Royal Dutch Shell shares: buy or sell?
CNN’s 12-month Shell stock forecasts as of February 24, 2020 put RDSA between $53 and $88, with a median return of nearly 44 per cent.
Out of 26 analysts surveyed, all the views appear to be on the upside, with the lowest estimate being $53.62, which results in a potential lower-end 9 per cent return over the next 12 months.
Even though the stock has been following a downward pattern recently, analysts appear to agree on its future and the most optimistic ones are even indicating that the stock may touch the $90s, which would ultimately result in a 79 per cent return for investors who jump in right now.
Is Royal Dutch Shell a good investment?
Out of 28 analysts polled by CNN, nearly 16 consider Royal Dutch Shell (RDSA) a buy, while only 3 of them consider that the stock will outperform. The remaining 9 analysts consider that the stock should be held by those who already own it and it is important to say that none rated the stock as a sell.
There are various elements that are influencing this favourable stance towards RDSA and some of those are:
#1. A strong dividend yield
Royal Dutch Shell (RDSA) dividends per share have been kept the same for many years now and this is something that makes the stock desirable for individuals looking for attractive fixed-income alternatives in a low-yield environment.
RDSA’s current dividend yield remains at nearly 8 per cent and considering that most analysts see the stock as a buy, Shell appears to be a good investment for both income and growth investors.
#2. Prices are strongly influenced by potential temporary circumstances
Even though the fear of a worldwide coronavirus pandemic is not completely illogical, the virus appears to be under control and it should not affect the global economy for a period longer than a year.
Considering that the stock’s P/E (12.61) is significantly lower than the market’s overall P/E (23.77) this stock may be undervalued based on the company’s fundamentals, potential long-term growth, and financial stability.
#3. An attractive margin of safety
Let us say that all Royal Dutch Shell share price forecasts miss the mark and the stock remains flat for the next 3 to 5 years. If that is the case, which appears to be unlikely, the dividend yield should still provide a sufficiently attractive return compared to the overall market’s long-term performance of 7 per cent CAGR based on Graham/Dodd’s historical 200-year market performance database.
#4. Shell’s debt remains manageable
Even though Shell’s debt has reached a high level compared to its peers, the company still enjoys a comfortable credit rating from major agencies including S&P Credit Ratings (AA-) and Moody’s (Aa2 with a stable outlook).
The probability of a default is very low for Shell and the company’s core business is sufficiently diversified to withstand temporary adverse fluctuations in the price of the commodities it deals with including oil, natural gas, and other petrochemicals.
Additionally, Shell has positioned itself favourably as a global leader in the production of LNG which should provide enough room for growth over the course of the next 5 to 10 years.
Bottom Line
Royal Dutch Shell share price predictions seem to favour the stock’s short-term and long-term growth and its dividend yield remains the most compelling element of this investment. A significant number of analysts appear to agree that Shell is a buy, and the expected return for the next 12 months ranges from 79 to 9 per cent. Do you want to become a part of the market and make your own bets on the future of Royal Dutch Shell? Join Capital.com where all major energy stocks are at your fingertips.
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