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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Royal Dutch Shell

October 2nd 2018

Royal Dutch Shell


Industry: Oil

Price as of 9/28: $68.14


Brent crude rose to $82.72 a barrel on Friday, the highest level since Nov. 10, 2014. Declining oil production out of Venezuela and new sanctions going on Iran next month has kept oil supplies limited and prices high. President Trump has called on OPEC and Saudi Arabia, the world's largest oil exporter, to add oil to the market to offset any supply issues, but Saudi Arabia is concerned of Non-OPEC or the US increasing production next year to erase any supply issues. However, the US producers particularly out of the Permian basin in Texas are facing their own bottlenecks with not enough pipe or other ways to distribute and export their oil. In the short term, it looks like the price of oil is going higher. Good news for oil stocks, but oil stocks haven't been receiving a lot of love from Wall Street. The energy sector has been the worst performing sector four out of the last six years and is in the middle of the pack so far this year even as oil has moved to a four-year high.

The improving fundamental should provide investors will a good investment opportunity either in the large cap dividend paying oil stocks or some of the smaller faster growing next generation oil companies. The most attractive looking oil stocks are Internationally. Royal Dutch Shell (RDSA) has spent the past few years selling assets so that it could reduce its debt after buying BG Group. The company recently hit its $30 billion asset sale target, putting it in the position to start returning more money to shareholders above its dividend, which is one of the highest-yielding payouts in the oil patch at 5.4%. Similar to Apple and the big bank stocks, Shell has launched a $25 billion share repurchase plan that it hopes to complete by the end of 2020. That's enough cash to retire roughly 9% of the company's outstanding stock at the current price. Even without the buyback, Shell looks cheap trading for 12 times earnings and just 10 times next years earnings. Wolfe Research upgraded the stock with a $88 target or 30% above current levels.

Another great International oil company is British Petroleum (BP). BP has had its troubles, but has done a good job of slowly improving their fundamentals. BP expects to continue to cut costs and bring its break-even point to a range of $35 per barrel to $40 per barrel by 2021. Currently, BP trades for 12 times earnings. If BP can continue to cut costs, their earnings and cash flow will improve allowing for more dividend hikes and more share buybacks in the future. In the meantime, shareholders get a 5.2%. dividend while they wait.

Our featured stock from February, Geopark (GPRK) continues to execute. The stock is up 100% since February, but sales are up 100% year over year. Even with the run up, the stock still only trades for 2 times sales. In numerous presentations, Geopark expects to double or triple production in the coming years. Based on future oil production estimates, Geopark's management believes their own stock could be worth between $29 to $44 a share or 50% to 100% from current levels. With the 100% run up, Geopark's stock has become more volatile, and earnings remain low as they continue to reinvest profits into more production, but if Geopark can continue to execute, the stock should continue to appreciate in the coming years.