In October 2020, the Shell (LSE: SHEL) share price sank to lows of around 900p. At the time, there was extremely limited demand for oil and the company had recently posted huge losses resulting from impairment charges. However, the landscape looks very different for the oil giant at the moment. With oil prices soaring, the firm has been able to report record quarterly profits, meaning that its share price now sits at 2,380p. This is over double its lows in 2020 and 75% higher than this time last year. But can this stellar performance continue and for how long?
Recent trends in the Shell share price
The main reason for the recent surge in the Shell share price is the rising price of oil. Indeed, at the start of June last year, WTI Crude was priced at under $70 a barrel, whereas it has now reached around $115 per barrel. This rise has been caused by declining supply due to the tragic Ukraine-Russian war, alongside increased demand as global pandemic restrictions have been lifted.
These high oil prices have led to very strong profits. In fact, in the first quarter, the oil giant reported adjusted earnings of over $9bn, far higher than the $3.2bn reported in the first quarter of last year.
This has also enabled the group to improve in other areas of the business. For example, net debt now totals around $49bn, over $20bn lower than last year. Shareholder returns have also increased, with the quarterly dividend now totalling 25 cents per share. Although this equates to a slightly lacklustre yield of 3.3% due to the high Shell share price, it’s extremely sustainable considering the current profits the group’s making. Shell has also announced a share buyback programme of $8.5bn, which should also help to boost the share price.
So far, there seems very little wrong with Shell. However, I do have three main concerns about the company.
Firstly, there’s the recent windfall tax that the government has introduced, to help people deal with high energy prices. Although the impact on Shell isn’t fully known, it may restrict the company’s ability to return cash to shareholders.
Secondly, I don’t think that these high oil prices are sustainable for the long term, especially considering climate change issues. Therefore, Shell may be forced to rely on other parts of its business, such as the renewables sector. This is still in its infancy, however.
Finally, I have ESG concerns about Shell, due to its role in contributing to global warming. For example, a safety consultant, Caroline Dennett, recently quit the company stating that it was “causing extreme harms”. This provides me with a strong reason to stay away from a company.
What am I doing now?
Right now, the Shell share price is soaring, and its recent rise has been understandable. But I’m less confident about its long-term future as I don’t believe that the current oil price is sustainable. Because of this, I don’t see a long-term upward trajectory for the share price. I’ll be observing Shell shares from the sidelines, but I won’t buy.