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Shell Looks Compelling as It Restores Full Cash Dividend

The market is underestimating Shell's potential even though the firm hasn't earned an economic moat.

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Shell recently announced it would restore its full cash dividend with the fourth-quarter payment. The decision came earlier than we expected but is not entirely surprising as we estimate Shell's break-even at $50/barrel next year. Shell also increased its annual organic free cash flow target by $5 billion for 2019-21 and reiterated its plans to repurchase $25 billion of shares during the next three years.

With the BG acquisition in the books, Shell is taking the necessary steps to compete in a world of $60/barrel oil. Like the rest of the integrated group, Shell is working to reduce its cost base by cutting headcount and improving its supply chain. The integration of BG is key to Shell's efforts, as it holds the potential for significant cost-reduction synergies. Furthermore, the addition of BG's low-cost production reduces Shell’s per-barrel operating cost, which has ranked among the highest in its peer group. By the end of 2016, Shell had already reduced operating cost by 20% from 2014 levels, but further reductions are now possible.

Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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