Why Shell's share price could skyrocket alongside this sector peer
The prospects for the resources industry have improved significantly in recent months. Commodity prices have generally been buoyant, investor sentiment has picked up, and this has caused share prices across the sector to do likewise.
As such, the prospects for Shell(LSE: RDSB) appear to be relatively encouraging. It is due to report improving financial figures and could therefore deliver strong share price growth. However, it's not the only resources company that could do so. Reporting on Thursday was a sector peer that seems to offer growth at a very reasonable price.
The company in question is diversified resources company BHP Billiton(LSE: BLT). It released an operational review for the first nine months of its financial year which showed that it continues to make strong progress. All of its major projects under development are tracking to plan, while it expects to deliver copper equivalent production growth of 6% for the current financial year.
This is due to have a positive impact on the company's financial performance. Its bottom line is forecast to rise by 29% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of 0.5, which suggests that investors have not yet fully priced in its growth potential. As such, it may offer a wide margin of safety that could lead to improving share price performance.
Furthermore, BHP Billiton has a dividend yield of around 5% at the present time. With a refreshed dividend policy that appears to make its income prospects more sustainable and an outlook for commodity prices which is relatively upbeat, the stock appears to have high total return potential over the long term.
Shell may also deliver high returns. It is in the process of making various changes to its business. For example, the acquisition of BG Group has expanded its operations in the LNG space, and this could help to broaden its growth prospects. Following the deal, the company is seeking to make divestments as it aims to maintain a relatively high degree of efficiency versus its sector peers.
Shell is also aiming to deleverage its balance sheet. Improving cash flow could help it to do so, while capital raised from selling assets could also help to lower its balance sheet risk. This could create a stronger business for the long term which is better suited to what may prove to be a volatile period for the oil and gas sector.
With the company forecast to post a rise in its bottom line of 53% in the current year, it trades on a PEG ratio of just 0.3. For an oil and gas major, this seems to be a highly appealing price to pay. As such, now could be the perfect time to buy it, with the problems experienced in recent years from a low oil price unlikely to be felt over the medium term.
Peter Stephens owns shares of BHP Billiton and Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.