The Shell (LSE: RDSB) share price has plunged in value this year. The stock has recently fallen to levels not seen for over two-and-a-half decades.
Multiple headwinds
It’s easy to understand why investors have been selling Shell in 2020.
For a start, the price of oil has plunged as demand has slumped. Earlier in 2020, some analysts forecast a 10% overall decline in oil demand this year thanks to the Covid-19 pandemic. The plunging oil price has wreaked havoc with Shell’s bottom line. The company has also had to write off billions of dollars of assets.
Second, the whole Big Oil sector has faced selling pressure as investors have come under pressure to dump polluting companies. These businesses are some of the biggest polluters globally, and that’s not going to change any time soon. That’s what worried investors who are concerned about their carbon footprint.
Third, earlier this year, Shell was forced to cut its dividend. Shell has been considered a dividend champion since the Second World War — the last time the company reduced the payout. Management’s decision to take this drastic step showed just how much impact the issues above are having on the group.
The Shell share price is too low
Considering all of the above, I think Shell’s share price is rightly worth less than it was at the beginning of the year. However, I think the market is too pessimistic about the company’s long-term prospects.
For example, while the demand for oil and gas is set to fall this year, analysts expect a rebound in 2021. And they also reckon global oil and gas demand won’t peak until 2030.
So, Shell has a decade to refocus the business. It’s already doing just that. Management has earmarked $2bn a year for renewable energy projects and plans to accelerate this spending in the years ahead. The group has been working to build out its energy supply business, which should bring it to new customers. It has also been investing in renewables, such as solar and wind.
The company is not abandoning oil and gas entirely. It wants to get the mix right and use cash flow from legacy assets to fund new projects. I think this is the right course of action as it allows Shell to mix the best of both worlds.
As such, I reckon investors have been too eager to dump Shell shares over the past year. Today the stock offers a dividend yield of 6.5%, even after the recent payout cut. What’s more, the stock is changing hands at a forward price-to-earnings (P/E) multiple of less than 10. That’s compared to the company’s long-term average of around 15.
While Shell might encounter further headwinds in the near term, I think the company has all the tools necessary to stage a robust recovery in the long run. In the meantime, investors will be paid to wait.
