Here's why the best is yet to come for Royal Dutch Shell plc shares

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Shell LNG

It's been a tough few years for oil producers, as the price of oil collapsed from well above $100 a barrel in mid-2014 to a low of below $30 dollars in early 2016. That provided investors with a once-in-a-decade opportunity to pick up shares in FTSE 100 giant Royal Dutch Shell (LSE: RDSB) at a bargain price.

The oil price has recovered to above $50 and Shell's shares have climbed from a low of under £13 to just over £22, currently. Nevertheless, Shell's three-year total return (which includes dividends) still lags the total return of the FTSE 100. The company has delivered an annualised 4.6% over the period, while the index has delivered a superior 8.2%.

I believe Shell is set reward investors with a much superior return over the next three years to the 4.6%-a-year it provided over the last three. Here's why.

Bold move

Bold moves by companies when industries are depressed can reap big rewards for many years to come. Shell's mega-acquisition of BG Group was certainly bold and I also reckon it will deliver those long-term rewards.

The company reported good progress on the integration of BG in its annual results last month. Chief executive Ben van Beurden commented: "we are operating the company at an underlying cost level that is $10bn lower than Shell and BG combined only 24 months ago".

The acquisition is helping transform Shell into a significantly lower-cost operator. For example, at an oil price of $60, new Shell's free cash flow is forecast to rise to $25bn in 2020 compared with old Shell's $12bn at an oil price of $90.

Divestments

In addition to the acquisition of BG, the other major component in Shell's transformation is the disposal of higher-cost assets. On this front, too, the company is making good progress.

The chief executive said in the latest results: "we are gaining momentum on divestments, with some $15bn completed in 2016, announced, or in progress, and we are on track to complete our overall $30bn divestment programme as planned".

At the same time, Shell is passing the mid-point of its new-project cycle, which means a period of lowering capital expenses as more projects complete.

Dividend

Shell has a proud history of never having cut its dividend since the end of World War II. The current strategy is designed to deliver increasing free cash flows to support the dividend and enable it rise over time.

Even as things stand, the recovery in the oil price enabled Shell to report last month that "for the second consecutive quarter, free cash flow more than covered our cash dividend".

With the yield running at 6.5%, dividends will be a significant part of investor returns. However, I can also see the shares rising strongly in the coming years, if -- as I expect -- the oil price continues to recover over time and Shell's strategy begins to deliver the tremendous levels of free cash flow management is targeting.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.