M4 BARRON’S February 15, 2021
L
ike many energy companies,
Royal Dutch Shellhad a rough
- But that bad news is
mainly in the rearview mirror,
and now the stock looks significantly
undervalued.
“If you distill it down, it’s the best in-
ternational oil company in deep-water
production,” says Jon Rigby, an oil-stock
analyst at Swiss bank UBS.
Investors hoping to profit from the
British-Dutch group’s likely stock appre-
ciation should consider buying the Lon-
don-listed shares (ticker: RDSA.London).
Rigby sees the stock rallying over the next
12 months to 18.10 pounds sterling ($25),
or 33% above its recent price of £13.61.
U.S.-based investors might turn to the
American depositary receipts (RDS.A),
recently trading at $38.52, which should
see a similar percentage rally if the dol-
lar/pound exchange rate remains stable.
Investors would likely get an additional
3% dividend yield, and there is the poten-
tial for a boost via a stock buyback.
Rigby bases his price target on a rea-
sonable oil-price forecast of $60 a barrel
for Brent crude—about where it was re-
cently. “If we can sustain $60 Brent, then
Shell generates 10%-plus free cash flow
versus market cap,” Rigby says.
The Covid-19 pandemic has hit major
oil companies hard. Shell lost $21.7 bil-
lion last year, including a $4 billion loss
in the fourth quarter, compared with
profits of $15.8 billion in 2019.
As a consequence of the awful busi-
ness conditions, shares in the $150 billion
market-cap company took a beating over
the past year, with the stock down 32%
through Tuesday. Still, a lower share
price hasn’t scared off analysts. The U.K.-
based Share Centre says 23 of 34 analysts
covering the stock rate it a Buy or a
Strong Buy.
Wall Street is no doubt bullish because
the company made tough decisions to cut
By Simon Constable This time is also different than 2018,
says Marko Papic, chief strategist at the
Clocktower Group. Fed chairman Jerome
Powell, who hiked rates a full percentage
point that year, has turned ultradovish
during the pandemic even as Washington
cranks unprecedented spending. That
means the Fed could trail inflation, when
it comes, depressing effective returns
from U.S. bonds. “Real yields will go
down faster in the U.S. than anywhere
else,” Papic says.
A more substantive threat to emerging
markets this year may come from China,
which is tapping its policy brakes while
the U.S. floors the gas pedal. With coro-
navirus fading, Beijing will return to de-
leveraging economic engines like the
property market and shadow banking,
Budaghyan expects.
That’s sound policy but may prove a
rude awakening for commodities and
industrial stocks that have been soaring
on assumed Chinese demand. Especially
if Beijing overdoes it a bit. “The real risk
is that China makes a policy mistake se-
vere enough to offset $2 trillion in U.S.
stimulus,” Papic says.
Another risk that emerging markets
increasingly share with developed ones is
valuations that price in a vibrant post-
pandemic recovery. Bargains have disap-
peared as less fashionable sectors join a
rally that last year focused on Asian tech
stocks, says Josh Rubin, an emerging
markets portfolio manager at Thornburg
Investment Management.
He still sees value in names like Asian
insurance companiesPing An(2318.
Hong Kong) andAIA Group(1299.Hong
Kong), as a way to play the long-term
trend toward “financial inclusion,” or
China Gas Holdings(384.Hong Kong),
which is riding the carbon reduction
wave by replacing coal power in rural
China. But it’s getting harder. “A 2021
cyclical recovery is pretty well forecast,”
Rubin says. “We have to look now into
2022 and beyond.”B
EUROPEAN TRADER
Royal Dutch Shell Looks
Attractive as Oil Rises
costs last year. “We are coming out of
2020 with a stronger balance sheet,”
CEO Ben van Beurden said in an earn-
ings statement.
In 2020, Shell reduced operating ex-
penses by 12%, or $4.5 billion, ahead of
schedule, according to a recent Morning-
star report. A portion of the likely in-
creasing profits should go straight to
stock owners in the form of increased
dividends and stock buybacks,once the
company hits its debt target.
“Shell aims to return 20% to 30% of
operating cash flow to shareholders once
it reaches $65 billion net debt,” down
from around $75 billion at the end of last
year, the Morningstar report states. The
debt reduction should come partly via
asset sales and be completed around the
middle of the year, Rigby says.
Some investors worry that the oil busi-
ness is toast. While it is true that the auto
industry is phasing out gasoline-powered
vehicles, it could be decades before the
transition is complete. “Combustion vehi-
cles will be around for a long time,” says
money manager Adam Johnson, founder
of the Bullseye Brieffinancial newsletter.
In the meantime, Shell, like most other
major oil companies, is well aware of the
coming changes and has planned accord-
ingly. The company said in January that it
agreed to buy electric-vehicle charging
company Ubitricity as part of its plan to
become net zero on carbon by 2050.
Ubitricity operates the largest public EV
charging network in the U.K. and has
growing networks in Germany and
France. On Thursday, the company said it
will increase the number of charging
points to 500,000 from 60,000 by 2025.
Still, there are risks to investing in any
oil stock, and that includes Shell. The
energy business is notoriously subject to
periodic booms when the price of oil
peaks, followed by busts when it falls.
However, for those with a healthy risk
appetite, Shell seems like a good bet for
the near future.B
EMERGING MARKETS
No Ripple Effect Yet
From Rising U.S. Rates
R
ising U.S. interest rates can be
bad news for emerging markets,
as capital flees to improving re-
turns in the world’s biggest mar-
ket. In 2013, then-Federal Reserve chair-
man Ben Bernanke started the so-called
Taper Tantrum by merely suggesting he
might dial back quantitative easing.
Emerging market stocks dropped 15%
in a month. A real Fed tightening cycle in
2018 coincided with an 8% loss for
emerging market equities that year.
Treasury yields have climbed a quar-
ter of a percentage point since Jan. 1,
driven by renewed fears of inflation. But
no new tantrum has come yet. The
iShares MSCI Emerging Marketsex-
change-traded fund (ticker: EEM) has
gained 12% year to date, trouncing a 4%
advance in the S&P 500 index.
Emerging market assets “are still fairly
well behaved because U.S. rates are rising
for the ‘right’ reasons,” says Alejo Czer-
wonko, chief investment officer for
Americas emerging markets at UBS
Global Wealth Management. That is, a bit
of healthy reflation in the air as vaccines
and fiscal stimulus balm the wounds of
the pandemic.
The current 10-year Treasury yield
around 1.2% would still have been near
an all-time low pre-Covid 19, notes Eric
Baurmeister, senior portfolio manager for
emerging markets debt at Morgan Stan-
ley Investment Management. Alarm
about rising prices looks premature, with
10 million Americans still out of work.
“We’re just not up to inflation yet, which
is a nice environment for EM,” he says.
Emerging markets themselves are in
better shape to withstand some centripe-
tal force than in 2013, adds Arthur Bu-
daghyan, chief emerging markets strate-
gist at BCA Research. “Then you had
large current account deficits and over-
valued currencies across EM,” he says.
“The vulnerabilities now are much less.”
By Craig Mellow