Royal Dutch Shell (LSE: RDSB) is one of the UK’s best-known businesses. The oil & gas explorer and producer has been around since 1907, so it’s 114 years old. And the Anglo-Dutch supermajor’s yellow and red Shell logo (called the ‘pecten’ after the seashell Pecten maximus) can be found across the UK. Also, its advertising slogan “You can be sure of Shell” was familiar to generations of Brits. But with the Shell share price suffering a brutal 2020, can I still be sure of Shell today?
The Shell share price collapses
Thanks to its mega-cap valuation, Shell has always been a super-heavyweight of the UK stock market. At Thursday’s closing price of 1,679.8p, the energy giant is valued at £129.2bn. This places it at #2 by size in the FTSE 100 index. However, the Shell share price has been even higher this year, peaking at 1,714p on 5 October. In spring 2018, the Shell share price was flying high, closing at a record high of 2,841p on 21 May. But the stock weakened to finish 2019 at 2,239.5p. Then the Covid-19 crisis exploded in early 2020 and the stock went into meltdown.
As coronavirus lockdowns were imposed, the price of a barrel of Brent Crude oil crashed from $70 to under $16 in three months. Naturally, RDSB stock followed suit, plunging to a rock-bottom low of 845.1p on 28 October 2020. That’s a loss of close to £20 a share in two-and-a-half years (and a collapse of 69.5% from RDSB’s all-time high). Writing about Shell on that very day, I said I was sure Shell would be well. My buy call turned out to be perfectly timed, as the Shell share price has roughly doubled (+98.8%) in less than a year. But that was the past and investors must look to the future. So can I be sure of Shell today?
Shell is a pure-play on energy prices
The surge in the Shell share price is largely down to skyrocketing energy prices. A barrel of Brent Crude oil costs $81.86 today, up 80% in 2021 and close to its three-year high of $83.47. Likewise, the price of gas has exploded. In August, natural gas cost around £1 a therm. Yesterday, it peaked at over £4 before falling back from this all-time high. Also, Shell has been cutting costs and selling assets. Thus, much of the extra profit from higher energy prices drops straight into its bottom line.
Then again, Shell is very much an old-school energy business. It’s also a major contributor to global pollution and rising CO2 levels causing climate change. This makes its shares unwanted by ethical and environmental investors. That said, based on the current Shell share price, the stock offers an above-market dividend yield of 4.2% a year. What’s more, this is covered a healthy 2.9 times by earnings. But the group cut its dividend in 2020 and might do so again if energy prices crash in future. Hence, I expect the stock to stay fairly volatile over 2021/22. Though I don’t own RDSB at present, I’d buy at the current share price to add extra income to my portfolio. In short, I think I can be fairly sure of Shell for now!
