Does Royal Dutch Shell Support a Turnaround?

With shares of Royal Dutch Shell (NASDAQ:RDSA) trading around $65, is RDSA an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Royal Dutch Shell operates as an independent oil and gas company worldwide. The company explores and extracts crude oil, natural gas, and natural gas liquids. It also converts natural gas to liquids to provide fuel and other products, as well as engages in manufacturing, supplying, and shipping crude oil. The company holds interests in approximately 30 refineries, 1,500 storage tanks, and 150 distribution facilities.

Last week, Royal Dutch Shell became the latest firm to bail on efforts to transform Western Slope oil-shale rock into oil, announcing that it is abandoning its Mahogany project in Colorado. In February 2012, Chevron (NYSE:CVX) ceased its oil-shale research in Rio Blanco County. Shell spokeswoman Kelly op de Weegh said: “The energy markets have evolved since we started the project in 1982. We are exiting our Colorado project to focus on other opportunities.” The target of the Mahogany Research Center has been to turn oily shale rock into liquid by heating the rock in situ and pumping it out.

T = Technicals on the Stock Chart Are Mixed

Royal Dutch Shell stock has struggled to make positive progress this year. The stock is currently trading near the lower end of its yearly range, so it may find support at current prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Royal Dutch Shell is trading between its key averages, which signals neutral price action in the near term.

RDSA

Source: Thinkorswim

Taking a look at the implied volatility and implied volatility skew levels of Royal Dutch Shell options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Royal Dutch Shell Options

16.47%

66%

65%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

As of Monday, there is average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

E = Earnings Are Mixed Quarter Over Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Royal Dutch Shell’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Royal Dutch Shell look like and, more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-58.33%

-7.86%

1.82%

1.79%

Revenue Growth (Y-O-Y)

-4.62%

-6.67%

2.92%

-8.36%

Earnings Reaction

-5.75%

N/A

N/A

N/A

Royal Dutch Shell has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have not been pleased with Royal Dutch Shell’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Royal Dutch Shell stock done relative to its peers, Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP (NYSE:BP), and sector?

Royal Dutch Shell

Exxon Mobil

Chevron

BP

Sector

Year-to-Date Return

-4.55%

0.06%

12.71%

0.79%

2.07%

Royal Dutch Shell has been a poor relative performer, year to date.

Conclusion

Royal Dutch Shell is focused on oil and gas exploration and distribution, with operations all around the world. The company is reportedly moving away from continuing its efforts to transform Colorado’s Western Slope oil-shale rock into oil. The stock has struggled this year and is currently trading near the lower end of its yearly range. Over the last four quarters, earnings and revenues have been mixed, which has led investors to expect more from the company. Relative to its peers and sector, Royal Dutch Shell has been a weak year-to-date performer. WAIT AND SEE what Royal Dutch Shell does this quarter.

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