With oil and gas prices skyrocketing, it’s hardly surprising to see the Shell (LSE:SHEL) share price go through the roof. Over the last 12 months, the stock has climbed by more than 60%. And looking at the year-to-date performance, it doesn’t look like this momentum will slow anytime soon.
Sadly, historical stock price movements are a really poor indicator of future returns. And there are some troubling signs of an imminent growth slowdown on the horizon. With that in mind, let’s take a closer look at what’s going on now and what might happen.
The roaring Shell share price
Looking at the latest quarterly results, I think it’s fair to say Shell is successfully capitalising on surging oil and gas prices. Adjusted earnings for the last three months came in at $9.1bn. That’s 182% higher than a year ago. And it’s actually the highest quarterly profit in 14 years!
With cash flowing, management has been strengthening the balance sheet as well as returning capital to shareholders. Net debt now stands at just under $48.5bn, down from $52.6bn in December. And an $8.5bn share buyback programme announced in February is underway.
On top of that, the interim dividend has been declared at $0.25 per share and will be paid at the end of June. By comparison, the interim dividend in 2021 stood at around $0.17.
This is obviously fantastic news for shareholders. And it’s not exactly difficult to understand why the Shell share price is on fire at the moment.
Headwinds on the horizon
At the heart of the enormous surge in profitability lies commodity prices which, by nature, are cyclical. The main catalyst behind today’s skyrocketing energy prices stems from global supply chain disruptions and subsequent shortages.
But these issues may soon be resolved, potentially sending oil and gas prices plummeting back to Earth, taking the Shell share price with it.
A quick glance into derivatives reveals that futures contracts for both oil and gas are pricing these commodities lower by the end of the year. In other words, analysts believe prices will soon start to fall. Admittedly these are forecasts. And forecasts do have a habit of being wrong. But this isn’t the only threat to have caught my attention.
The UK government has been quite firm on its stance not to introduce a windfall tax against oil companies like Shell. Yet, without getting political, it seems chancellor Rishi Sunak has since come around to the idea. Specifically, he said if “companies are not going to make those investments in our country and energy security, then, of course, that’s something I would look at.”
With Shell returning an enormous amount of capital to shareholders rather than reinvesting the money into the UK energy infrastructure, I think the odds of a government intervention are on the rise. If a windfall tax is introduced, I doubt Shell will be in any serious financial pickle. But it could be sufficient to hamper growth, sending the Shell share price on a downward trajectory.
Personally, this unknown factor isn’t particularly enticing. Therefore, I won’t be adding any shares to my portfolio today.
