An Overseas Oil Stock for Your Portfolio

The following alert was sent out Oct. 17 notifying subscribers to the Morningstar InternationalInvestor newsletter that I had just bought shares of  Royal Dutch Shell (RDS.A) for the newsletter's real-money Passport Portfolio. This is just one example of the investment opportunities overseas. For more international picks, try a subscription to InternationalInvestor.

I am pleased to announce I bought 90 shares of Royal Dutch Shell for $48.38044 per share, including commissions, in the Passport Portfolio. This is one of the three super-major oil companies. It also owns the largest retail distribution network. Its huge scale and diversity should enable it to continue to be one of the leading oil companies in the world. After its embarrassing reduction in reserves in 2004, it has increased its focus on obtaining new oil reserves. It has also increased its involvement in renewable energy sources. Few competitors can rival its technology and engineering expertise, project management skills, and capital resources.

The price of oil has been cut in half from its peak, but it is still above where it was one year ago. Although oil might continue to decline, long term it will likely increase again. In July, I wrote that I expected commodities to roll over and have been happy to not own any. However, given the current prices stocks are trading at and the likelihood that oil demand will increase in the long term, I would like to have some exposure. In the meantime, Royal Dutch yields 6.5%, and, unlike most international stocks, it pays its dividend quarterly. The dividend is subject to 15% foreign tax withholding.

Morningstar's fair value estimate for Royal Dutch is $93, and our Consider Buying price is $74.40 versus the current price of about $48. Even though I think our fair value estimate will likely come down when we do our next adjustment for oil prices, the stock is at the level it was in 2004 when oil prices were lower and the firm had just disappointed the Street by announcing a one-third cut in its oil reserves. Royal Dutch has a narrow moat and is one of only five international stocks with a low fair value uncertainty rating. The stock is trading at a P/E of 4.8, price/book of 1.1, price/cash flow of 3.8, and enterprise value/earnings before interest, taxes, depreciation, and amortization of 2.5, and it has a strong balance sheet. Please look for more information on Royal Dutch in the November issue of Morningstar InternationalInvestor.

(Note: On Nov. 17, our fair value estimate for Royal Dutch was cut to $70, and our fair value uncertainty rating was raised to medium. Our Consider Buying price is now $49.)