http://www.barrons.com/articles/shell-the-worlds-best-oil-stock-1468641709 http://finance.yahoo.com/chart/RDS-B Trade: With RDS-B at 57.01 Jan 47.50/50 bull call spread for a net debit of $160 Potential yield = 90/160 = 56.2% in 188 days or 100% annualized Prob = 78% Expectation = .78(90) - .133(160) - .09(80) = 70.2 - 21.3 - 7.2 = 41.7 Price.............. Profit / Loss.......... ROI % 35.00................. (160.00).......... -100.00% 43.00................. (160.00).......... -100.00% 47.50................. (160.00).......... -100.00% 49.10...................... 0.00................ 0.00% 49.66.................... 56.40............... 35.25% 50.00.................... 90.00............... 56.25% 55.00.................... 90.00............... 56.25% 65.00.................... 90.00............... 56.25% 75.00.................... 90.00............... 56.25% From Barron's: A dash of desperation is working wonders for Royal Dutch Shell. The price of Brent crude oil has fallen by half in two years, pulling Shell’s cash flow from operations well below what it typically needs to pay its dividend and fund exploration. Meanwhile, the purchase of United Kingdom gas specialist BG Group, completed in February, left Shell with a full tank of debt. Something had to give. Investors braced for a dividend cut, which is why the American depositary receipts (ticker: RDS.B) started the year priced low enough to yield 8%. But rather than reduce its payout, Shell slashed spending on projects and sold low-return businesses. Last month, it announced a capital plan through 2020 that calls for more asset sales and a limit on capital spending. The shares are up 24% year to date. Maybe that’s because crude has moved up 28% over the same period. And maybe investors are gaining a bit of confidence in the dividend, although the yield, at 6.6%, is double what ExxonMobil (XOM) pays. Whatever the reasons, Shell, recently $57.01, could top $70 in a year, for a total return of about 30%. Indeed, the dividend looks affordable through the end of the decade and beyond, even with a lower oil price. And with crude production falling, the price might push higher in coming years. More important, Shell’s new plan looks like more than just an austerity drive. It looks like a recommitment to capitalism. The industry goes through a financial reckoning from time to time. When oil prices are high, Big Oil reports hefty profits from existing production. You’d think it would then reinvest capital at attractive rates of return. Instead, the supermajors spend lavishly to buy up and drill into anything that smells like reserve replacements, while competing against upstarts and newly ambitious state-owned oil companies for scarce resources. The result is a dwindling return on capital employed, which the market ultimately punishes with a lower stock valuation. Investors tend to think of energy stocks as something to buy when low oil and gas prices look ready to rebound. An even better approach might be to buy them when market conditions have battered them into embracing better capital discipline. https://si.wsj.net/public/resources/images/ON-BT271_Shell__11U_20160715201936.jpg https://si.wsj.net/public/resources/images/ON-BT269_Shell__11U_20160715201803.jpg What could go wrong? Oil prices could remain weak for years. Shell’s plan assumes $60 oil by 2018, in line with the view of many analysts, based on production declines. The U.S. Department of Energy reckons U.S. oil production, 9.4 million barrels per day last year, will fall to 8.6 million this year and 8.2 million next year. China, too, recently cut its oil output sharply. If oil prices fail to rise, however, Shell could fall short of its free-cash-flow target, or have to settle for lower prices than it expects for its divestments. Management says the company’s back isn’t up against the wall on sales, and that the new cost structure is designed to generate enough free cash to cover the dividend even at the low point of the oil price cycle. But it could be wrong. The stock’s valuation seems low enough to offset the risk. Over the past decade, Shell’s price/book value ratio has plunged to 1.2 from 2.5. On that basis, the stock’s discount to the Standard & Poor’s 500 index has widened to nearly 60% from less than 10%. Investors have been right to snub the stock based on rampant overinvestment at low returns. But that discount should narrow as the company reduces spending. A rise to $70 in a year would bring the stock to 1.4 times book. Exxon, which Evercore ISI’s Terreson estimates can earn an 11% return on its capital employed in a typical year, fetches 2.3 times book.