Shares in oil giant Shell (LSE: SHEL) are having a great run at the moment. This year, the stock has been one of the FTSE 100’s best performers, rising 33%. Over 12 months, the share price is up about 60%.
I made the mistake of selling my Shell shares last year. So I’ve missed out on the recent gains, which is frustrating. Is it time to buy back into the energy powerhouse? Let’s take a look.
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Is the stock appealing now?
One attraction of Shell right now is that, with oil prices at sky-high levels due to the Russia-Ukraine crisis, the company is doing very well. At present, it’s literally minting money.
Indeed, last week, Shell posted cash flow from operations (CFFO) of $14.8bn for the first quarter of 2022, up a whopping 81% on Q4 2021. Free cash flow amounted to $10.5bn, up 36% year-on-year. Meanwhile, on the earnings front, the group made $9.1bn for the quarter. That was nearly triple what it made in the same period in 2021.
Looking ahead, I think it’s likely that oil prices will remain elevated for a while, due to the sanctions against Russia. Recently, the US Energy Information Administration (EIA) said it expects the price of Brent crude oil to average $108 per barrel in Q2. So I expect Shell to keep performing well in the near term.
Another thing to like about Shell at present is that it’s returning cash to shareholders. In its recent Q1 results, the group said it was increasing its quarterly dividend by 4% to $0.25 per share. If it was to pay out four of these $0.25 dividends for the year, that would equate to a yield of around 3.6% at the current share price.
Meanwhile, the company is also buying back shares. In the first quarter of 2022, it bought back $4bn worth of stock. For the first half of the year, it plans to buy back $8.5bn worth of stock. This should boost earnings per share going forward.
However, despite this momentum, and the growing dividend, the stock still has a very low valuation. With analysts expecting the group to generate earnings per share of $4.66 this year, the forward-looking P/E ratio is just six.
At that multiple, I see the stock as undervalued. Given the low valuation, I wouldn’t be surprised to see the share price keep rising.
A key issue for me with this stock though is the fact that oil prices tend to fluctuate a lot. While they are high now, they may fall when the Russia-Ukraine crisis subsides and supply and demand imbalances moderate. This would have an impact on Shell’s profits, and share price. I don’t like the uncertainty associated with energy prices here.
Another issue is the increasing focus on sustainability globally (which is why I sold my Shell shares in the first place). This could create challenges for the company in the long run. Shell is making some moves in the renewable energy space. I’m just not sure it’s doing enough.
Given these issues, I’m going to leave the stock on my watchlist for the time being. Right now, I think there are better stocks to buy.