First allow me to be clear, my target price is a long term one. I do not expect a straight line and I do in fact expect some fantastic buying opportunities in the short term. However, for those who do not want to ‘time their entry’, I see little downside in investing now.
We have been waiting months, nay years (because two is a plural) for OPEC to act and cut the cartels output. The idea has been thrown around by Venezuela for some time, but only mooted with any seriousness at the turn of 2016. Iran has, until now, been wholly against such a freeze on the basis that it wanted to see production return to pre-sanction levels before it would consider co-operating.
That being said, Tehran’s reluctance to take part in a deal now appears to be thawing somewhat, with Iran’s oil minister Bijan Zanganeh stating “Opec made an exceptional decision,”
In principle the cartel has agreed to cut production to 32.5m-33m barrels a day, and prices initially rose in response to this positive news. That is until the market digested what this means. Crude production for August was 33,237,000 barrels for OPEC. Compare this to Q4 2015 when OPEC production was averaged 32,498,000 (and prices were below $40.00 per barrel as a consequence). Clearly a price reduction to levels that remain above Q4 2015 will not have a significant impact beyond the initial sentiment shift. American shale remains the swing producer and will keep the price controlled until the fields begin maturing, or the lack of investment in the sector bites, which analysts seem to all agree will be in 2018-19.
Despite the price of oil looking like it wont meaningful surpass the $50 psychological resistance level for some time to come, RDSB does benefit from a reputation of having not cut its dividend since World War 2, a fact repeated by bullish analysts. This policy looks to remain in place as the company seems more inclined to dispose of assets and take on more debt rather than cut the dividend. I must confess to being surprised that the company did not continue its buyback plan when the share price plummeted to sub £13 as it represented an excellent opportunity hoover up shares and reduce the dividend burden as a consequence. Nonetheless the management seem to be on the ball with diversifying the company into LNG by result of the BG takeover earlier in the year, a move that should not be understated as it has created the largest LNG player in the world.
On the subject of LNG, Panama (Alliance News) have today reported that Shell Western LNG BV, a subsidiary of Shell, has signed a framework agreement for the provision of LNG to its new LNG powered cruise ships, the first of which are due for delivery in 2019. This may be a small contract in the grand scheme of things, but a demonstration of LNG in action, and its unforeseen potential in the cruise ship industry.
The diversification of Shell in itself leads me to believe that the company will be around for a long time to come, and with the dividend remaining at current levels, income investors may be inclined to purchase Shell until the yield drops to 5% or even less.
My price target: £24.80.
I do not presently hold a position in Shell as I maintain my policy of keeping a portion of my portfolio as cash, and I am of the belief certain other stocks will riser faster in the short term. I intend to retake a position in Shell shortly