Is Royal Dutch Shell Undervalued at Current Prices?

With shares of Royal Dutch Shell (NYSE: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.

Royal Dutch Shell recently reported earnings, in which the company posted a 60 percent drop in profit for the quarter. The company faced a $2 billion write-down on shale oil drilling ventures in North America, showing that Shell’s drilling efforts have come up much shorter than expected. The company’s earnings were negatively affected by expensive exploration efforts and disruptions to oil production in Nigeria. In addition, the company also recently appointed a new CEO, Ben van Beurden, after Peter Voser decided to leave the company.

T = Technicals on the Stock Chart Are Mixed

Royal Dutch Shell stock has not made much recent progress. The stock is currently trading near the lower end of its yearly range. 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

15.68%

43%

41%

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 Friday, 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

-3.79%

3.10%

16.07%

1.68%

4.28%

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 recently posted earnings that have not really pleased investors. The stock has struggled to make significant progress in recent years and is now trading near the low-end of its yearly range. Over the last four quarters, earnings and revenues have been mixed, which has not really pleased investors in 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 coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.