Is now the time to buy Shell shares?

With oil trading at high prices, could Shell shares provide me with growth over the long term?

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Key Points

  • Pre-tax profits climbed to $29.2bn in 2021, from a pre-tax loss of $26.9bn in 2020
  • Oil prices are trading at high levels, with Brent crude consistently above $110 per barrel
  • Between 2017 and 2021, Shell had a compound annual EPS growth rate of 9.5%

Shell  (LSE:SHEL), the oil and gas exploration, production, and refining company, is listed on the FTSE 100 and operates across the globe. Like many businesses, the firm had a difficult period during the pandemic. With more favourable operating conditions, however, could this be a good time to buy Shell shares for my long-term portfolio? Let’s take a closer look.   

Financial resilience

There’s no denying that 2020 was a challenging year for the company. The Shell share price fell 43.5% over the course of that year.

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When the pandemic hit, demand for oil plummeted resulting in a collapse in the value of Shell’s products.

Despite these difficulties, the firm has bounced back in a very short space of time. Between 2020 and 2021, revenue has increased from $180.5bn to $261.5bn.

Additionally, pre-tax profits climbed to $29.2bn from a pre-tax loss of $26.9bn in 2020. These results prompted the company to initiate an $8.5bn share buyback scheme. And it’s currently trading at 2,407p.

Over a longer period of time, the business has also been delivering for its shareholders. Between 2017 and 2021, earnings per share (EPS) rose from ¢158 to ¢249. 

By my calculation, this results in a compound annual EPS growth rate of 9.5%. Even for a FTSE 100 company this is strong and consistent.

More recently, for the three months to 31 March, adjusted earnings increased 43%, quarter-on-quarter, to over $9bn. This was higher than forecasts of $8.6bn and tripled year-on-year.

It should be noted, however, that past performance isn’t necessarily indicative of future performance.

High oil prices and investment risks

With oil prices currently at high levels, Shell’s products are in demand. What’s more, the conflict in Ukraine has heighted supply concerns. This has resulted in surging oil prices, with some forecasting $130 per barrel for Brent crude this year. At the time of writing, it’s $114.80.

However, the Russian invasion of Ukraine also led to a $5bn write-off on Shell’s balance sheet after it sold its Russian business to Lukoil.

One issue is that the UK government has just signalled that it will U-turn on its position on windfall taxes on oil and gas companies. The move to tax these firms could be bad news for Shell shares.  

There’s the added risk that any future pandemic variant could affect oil and gas production, while denting demand for these commodities. This would likely have a negative impact on the company.

Overall, investing in this business isn’t without its risks. Yet while there are potential looming challenges, I think heightened demand for oil and gas is here for the time being. Buying Shell shares could give me exposure to this trend, and I think they could add value to my portfolio over the long term. I will be buying some shares soon.

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Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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