When we look for growth candidates, soaring EPS forecasts are really what we want to see -- even better if that gives us super low PEG ratios of around 0.7 or less.
Stocks that meet these criteria are usually small-caps expected to grow a lot bigger in the next few years. But this is Royal Dutch Shell(LSE: RDSB) I'm talking about -- the biggest company in the whole of the FTSE 100, with a market cap of more than £175bn.
With the shares priced at around £22.40, they would need 25% rise to reach the £28 level, and I think that's entirely possible before the end of 2017.
In 2016, Shell saw profits rising again for the first time in five years -- on a current cost of supplies basis, earnings attributable to shareholders fell by 8%, but that's to be expected when oil prices are rising (and that bodes well for the future).
Return to growth
Forecasts for this year suggest a near-doubling of EPS and put the shares on a forward PEG of just 0.2 -- and for 2018, a further predicted rise of around 25% would give us a still very attractive PEG of 0.5.
That would drop the P/E to only around 12 by 2018, and I see that as way too low -- especially when the long-term FTSE 100 average stands at around 14, and that includes plenty that are paying low dividends.
And speaking of those dividends, they're not actually covered by earnings yet, but 2017's should be close -- and by 2018 we'd be looking at cover of around 1.2 times. With the dividend maintained solidly right through the oil price slump, and with Shell having plenty of cash, I really can't see it being cut now. And with my expectation that Shell would only maintain it if it saw eventual cover of at least two times, I'm hoping for earnings per share of around 300p in the medium term.
On that level, a £28 share price would put the P/E at under 10 and the dividend yield at around 5.3%, which still looks good. Oil prices are almost certain to strengthen in the long term, so I see such a valuation as almost inevitable -- and if investors look sufficiently forward, it could happen this year.
A smaller oily
Another company that should do well from a rising oil price is Premier Oil(LSE: PMO), and as a shareholder I was pleased to see the share price pick up a little in response to the company's refinancing update on 15 March.
The final loan holder has agreed to the firm's refinancing lock-up agreement, meaning that the agreements have become effective and all those who have locked-up are now committed to vote in favour of the refinancing package.
Premier is still expected to record a loss this year, but forecasts for 2018 suggest a return to profit -- and with the shares currently changing hands for 64p, they'd be on a P/E of a mere 2.5. Net debt at the end of 2016 stood at $2.8bn, so the P/E needs to be seen in that light, but I still see it as way too cheap.
The year saw record production of 71.4 kboepd, with the firm's acquired upstream assets from E.ON expected to bring payback in the first half of 2017.
Another upswing in the price of oil, and I could see Premier shares breaking the 100p barrier.
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Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has recommended 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.