Excellent Cash Flow
As a mature company operating in a mature industry, Shell (LSE: RDSB) (NYSE: RDS-B.US) has superb cash flow. For example, over the last five years its net operating cash flow has averaged over 25bn per annum and this allows the company to invest heavily in its asset base.
Clearly, the drop in the price of oil is likely to mean reduced cash flow and investment, but it is here where Shell can gain ground on its peers. In fact, with its cash flow being so strong, it may be able to invest in new projects to a much greater degree than its rivals, thereby providing itself with a brighter long term future should the price of oil return to more normal levels.
On the subject of the price of oil, the current level of around $60 is unlikely to last in the long run. Thats because, until now, an oversupply of oil has not had the desired effect in terms of knocking high-cost producers out of the industry, so that Saudi Arabia and other OPEC members can generate higher margins in the long run.
However, with OPEC members having very deep pockets, a low oil price could be here to stay in the short to medium term but, realistically, is unlikely to remain in the long run. Thats because eventually there will be a reduction in supply as it becomes uneconomical to produce at such low price levels.
And, with Shell having a strong balance sheet, it looks set to survive the current lows. Therefore, now could be a good time to buy in advance of the prospect of a higher oil price in the long run.
Even though Shells profitability may be rather volatile, it is still focused on rewarding shareholders through higher dividends. For example, dividends per share are expected to increase by 3.4% in the present year, which is almost over eleven times the current rate of inflation and means that Shell offers the prospect of a real terms increase in dividends in the present year.
And, with Shell having increased dividends by 3.8% per annum in the three previous years, it appears to be a relatively impressive income play for the medium to long term.
Clearly, Shells financial firepower means that it is capable of acquiring sizeable entities. In fact, with many companies in the oil sector seeing their valuations plummet in recent months, now could be an opportune moment for Shell to increase its presence in highly lucrative parts of the industry.
Certainly, there have been rumours regarding a potential bid for the likes of Tullow Oil and, even if this does prove to be little more than a rumour, sector consolidation is likely and Shells bottom line could benefit as a result.
Long Term Strategy
Of course, Shell is a great long-term investment because the company thinks long term. For example, it is currently rationalising the business through the sale of what it views as non-core assets. This is a sensible approach to take and means that, while it could mean that investor sentiment is hurt in the short run as Shell makes significant changes to its operating model, it sets the company up for a very bright long-term future.
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