Royal Dutch Shell (LSE: RDSB) has outperformed its UK peer BP so far in 2016. The Anglo-Dutch firm has climbed by nearly 8%, compared to a flat performance from BP.
One reason for this could be that investors are encouraged by Shell's progress with the integration of BG Group. In its recent Q1 results, Shell said that cost savings so far this year have cancelled out the extra cost of taking on the operation of BG's business.
These economies of scale also extend to capital expenditure. Shell expects to spend $30bn on capital expenditure this year, including BG capex. In contrast, Shell alone spent $33bn on capex in 2015.
It was always likely that the cost savings from integrating BG's business would be greater than expected. That's how these things are meant to work. The timing of the original deal looked poor, as the oil price kept on falling. However, this has probably contributed to Shell's ability to make bigger savings more quickly than expected.
Overall, I'm bullish about Shell's decision to acquire BG. I believe this $54bn deal will give Shell the opportunity to cherry pick long-term projects and raise a useful amount of cash from selected divestments.
Should you buy this 7.6% yield?
The elephant in the room is Shell's 7.6% forecast dividend yield. If the company can maintain its dividend payout while profits recover, then I'd argue the shares are a strong buy.
So will Shell's dividend be cut? This year's expected payout of $1.86 per share won't be covered by forecast earnings of $1.11 per share. However, the latest consensus forecasts suggest that Shell's adjusted earnings will rise by 83% to $2.03 per share next year. This should mean that the dividend is covered by earnings.
Unless the outlook worsens dramatically, I think a dividend cut is very unlikely.
I rate Shell as a strong buy, but the firm's £129bn market value may limit how fast the shares can rise.
A smaller commodity play
If you're looking for a commodity stock with the potential to deliver decent gains in a recovering market, you may want to consider gold miner Pan African Resources (LSE: PAF).
Pan African has already been a strong performer this year, climbing 78% on the back of the 15% rise in the price of gold. This rapid gain may not be repeated immediately, but I do believe this stock could rise further.
Pan African's latest results show the firm's all-in sustaining cost of mining is $908/oz. During the six months to December 2015 -- before gold's recovery really got under way -- Pan African's profits doubled from £5.5m to £10.9m.
Analysts expect a full-year profit of £31.4m in 2016. This equates to adjusted earnings of 1.8p per share, and puts Pan African on a forecast P/E of just 7.9. Unlike many gold miners, Pan African has been consistently profitable throughout the gold slump. With the exception of 2012, the firm has maintained dividend payouts for shareholders.
I'm pretty confident that this year's forecast dividend of 0.72p per share will be paid as forecast. This gives the stock a prospective yield of 5%.
I believe Pan African has the potential to outperform the wider market over the next few years.
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Roland Head owns shares of Royal Dutch Shell and BP. The Motley Fool UK has recommended BP and 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.