Does Royal Dutch Shell Have a Bright Future?

With shares of Royal Dutch Shell (NASDAQ:RDSA) trading around $70, 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.

Royal Dutch Shell has agreed to sell a stake in one of its Brazilian offshore assets to Qatar’s state-owned oil and gas company for $1bn. The disposal of a 23 per cent share in Parque das Conchas project, also dubbed BC-10, to Qatari Petroleum International comes as the Anglo-Dutch major is likely to step up efforts to raise cash in 2014 and 2015. Shell, Europe’s largest oil company by market value, has been accused by investors of spending too much in recent years and Ben van Beurden, the new chief executive who took the reins at the start of this year, is under pressure to improve capital discipline. As part of that, Shell is expected to sell some $15bn worth of assets over the next two years in one of the largest disposal programmes in its history. Already this year it has announced the sale of a stake in the Wheatstone LNG project in Australia to its Kuwaiti partners and is also eyeing the sale of an interest in a pipeline in the U.S.

T = Technicals on the Stock Chart Are Mixed

Royal Dutch Shell stock has struggled to make positive progress this year. The stock is currently pulling back and may need time to stabilize before heading higher. 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 above its rising key averages which signal neutral to bullish price action in the near-term.

RDSA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) 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

19.33%

93%

90%

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

Put IV Skew

Call IV Skew

February Options

Flat

Average

March Options

Flat

Average

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

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-34.56%

-58.33%

-7.86%

1.82%

Revenue Growth (Y-O-Y)

2.45%

-4.62%

-6.67%

2.92%

Earnings Reaction

N/A

-5.75%

N/A

N/A

Royal Dutch Shell has seen decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Royal Dutch Shell’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Royal Dutch Shell

Exxon Mobil

Chevron

BP

Sector

Year-to-Date Return

-0.97%

-5.28%

-6.80%

-2.59%

-2.91%

Royal Dutch Shell has been a relative performance leader, year-to-date.

Conclusion

Royal Dutch Shell is focused on oil and gas exploration and distribution, with operations all around the world. The company has agreed to sell a stake in one of its Brazilian offshore assets to Qatar’s state-owned oil and gas company for $1bn. The stock has struggled this year and is currently pulling back. Over the last four quarters, earnings have been decreasing and revenues have been mixed, which has produced conflicting feelings among investors. Relative to its peers and sector, Royal Dutch Shell has been a relative year-to-date performance leader. WAIT AND SEE what Royal Dutch Shell does this quarter.

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