It's no secret why shares of Royal Dutch Shell (LSE: RDSB) have plummeted over the past two years, but long-time investors who have been around the block will know that the best time to buy shares of cyclical oil & gas companies is when other investors are bearish and oil prices are low. Although crude prices have already rallied over 50% from their January lows, now could still be a great time to begin a position in Shell.
A winner for years to come
That's because Shell is well placed to thrive for decades to come. First, the company has wrung out enough efficiencies that it believes it will produce free cash flow of $20-25bn per annum by the end of the decade, even if oil remains around $60 per barrel. And, as climate change regulations begin to phase out coal use across the developed world, Shell will benefit both from an uptick in oil demand and also from a major increase in natural gas usage.
Shell, the world's largest commercial supplier of liquefied natural gas (LNG), also brings to the table incredibly profitable downstream operations that made the company profitable last quarter, even when crude prices were below $30. This resilience combined with a 7% yielding dividend and good future prospects leads me to believe Shell will continue to be a winner for years to come.
Insurance and asset management giant Prudential (LSE: PRU) has also been buffeted by global economic headwinds that are out of its control. In this case the culprit is slowing growth from China, Prudential's largest growth market. Despite the bad headlines coming out of the world's second largest economy, Prudential still posted a 22% increase in new business profits from Asian operations in Q1 and a 37% jump in insurance sales in mainland China.
Looks like a bargain
Looking towards the years and decades to come, Prudential could be a great way to profit if you believe China's middle class will continue to grow as the economy reorients towards the service sector. Of course, Prudential is also partially shielded from any downside to Chinese exposure through its large presence in the US and UK. While the US business suffered in Q1 due to lower annuity sales, American operations were still highly profitable and the company's assets under management continues to grow there. With shares trading at a minuscule 10 times forward earnings and offering a potential 3.4% yielding dividend, Prudential certainly looks like a bargain to me.
Unlike Shell and Prudential, the woes of Rolls Royce (LSE: RR) have been entirely of the company's making. While air traffic and new plane orders have taken off at a torrid pace since the global financial crisis, Rolls Royce shares have been languishing due to a bloated management structure, investment in a new generation of engines and a series of profit warnings last year.
However, relatively new CEO Warren East, who enjoyed considerable success at ARM Holdings, has laid out ambitious plans to turn the industrial titan around. First amongst these plans is to cut costs by slashing middle management levels and modernizing manufacturing processes.
If East is successful in cutting costs and improving operations, Rolls is well positioned to catch up to GE, its only real competitor in the wide body engine market. This duopoly in a growth market, high moat to entry for competitors and a new CEO bent on turning around what had become a stodgy company has put Rolls towards the top of my watch list.
That said, the airline industry is a cyclical one and years of increasing demand for engines won't last forever. That's why I also have my eye on less cyclical companies such as those detailed in the Motley Fool's latest free report, Five Shares To Retire On.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.