The last few weeks in the Oil & Gas sector has beeneventful. OPEC chose not to cut its output rates and then theoil price fell off a cliff. Currently WTI sits just above $36 and Brents not much better at around $38. This has sentRoyal Dutch Shell (LSE: RDSB) down to levels not seen since 2009. The share price is currently below 1,500p.
For me this represents a huge buying opportunity that shouldnt be missed. Shell has a whopping dividend yield of over 8% and a PE ratio of 7.7. The market believes that a dividend cut is inevitable but Im not so sure. The dividend record of Shell is impeccable andthis isnt the first oil price decline the company has been through. The dividend cover is solid due to the flying profits of the downstream division. This is becauseintegrated oil companies have huge downstream divisions that offset losses from the upstream division when the oil price falls.
Cost controls
In response to the decline in the oil price Shell has reduced costs and capital investments to make the company more focused and competitive.And there have been divestments across the globe to make Shell a more streamlined company before the BG deal.
Many believe that theBG Group (LSE: BG) will push the company forward and ensure its future. It has now passed regulatory approval in Europe, Brazil, Australia, the US, and as of yesterdayinChina. This merger will ensure the dividend for years to come due to BGs ultra low cost developments in Brazil and Australia. I also believe that Shell will do anything to ensure thedealgoes through. CEO Ben Van Burden has said that he will do everything he can to ensure the takeover goes smoothly and there have also been staff cuts in the thousands to get the company ready for the deal. Only yesterday the company announced it wascutting around 3% (2,800) of the enlarged workforce.It has also saidthere will be over $3bn worth of cost synergies after the deal and this should aid Shells bottom line hugely.
BG share opportunity
RBC said yesterday that the preferred play here is to buy BG shares as a way to get Shell shares at a discount. Even though the deal has now passed allregulatory approvals there is still merger arbitrage to be played. Currently the offer premium stands at around 13%, this means thatthe BG share price is trading around 13% lower than the offer is worth in terms of the cash and Shell shares that will be received. For anyone looking to increase a holding or open a position in Shell, its a very attractive opportunity and one that deserves to be looked at in detail.
Obviously there can be no assurances that the deal goes through. However, the rhetoric from Shell indicates it will happen at all costs.I believe that the enlarged group will be a fantastic investment in years to come in terms of capital growth andincome.
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Jack Dingwall has shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
