Shell (LSE:SHEL) shares are up 76% over the past year. That’s remarkable when we consider the narrative during the pandemic when people wondered whether there was any value in hydrocarbon stocks.
But with the oil price surging in 2022, Shell and its peers have turned huge profits. Shell’s first-quarter profits were its highest on record. In turn, the share price has skyrocketed from 1,400p per share a year ago, to around 2,360p right now.
So, should I buy Shell stock or am I too late?
Recent performance
In May, Shell reported record first-quarter profits. Adjusted earnings rose 43% from the previous quarter to $9.13bn, beating average analyst forecasts of $8.67bn. Q1 earnings were nearly 300% greater than the $3.13bn reported a year earlier.
Shell also reported a 81% increase in cash flow from operating activities, reaching $14.8bn.
Soaring revenues were driven by an increase in the oil price which has been inflated by Russia’s invasion of Ukraine and sanctions levied on Moscow and Russian businesses. Brent crude hit $124 a barrel on Tuesday — the highest for three months.
Prospects
Firstly, Shell will be hit by a windfall tax relating to its huge Q1 profits, as will other energy firms. Shell said that the Chancellor’s tax “creates uncertainty about the investment climate for North Sea oil and gas for the coming years“.
The windfall tax will remain in place until “normal” conditions in the energy market return or until the end of December 2025.
In all honesty, I’m not sure how this will impact Shell’s operations. Some analysts have suggested it will be a sizeable hit, others have claimed that oil companies can frontload their investment plans to offset the windfall tax.
Shell’s current level of profitability is also dependent on oil prices remaining high. Oil dipped today and most analysts think it will remain just above $100 this year.
But there’s lots of factors at play here. There has been speculation that OPEC may eject Russia from its production calculations, therefore allowing OPEC members to increase their production. However, it’s not clear how much spare capacity there is within OPEC.
I also anticipate China will introduce more lockdowns this year as Beijing attempts to tackle Covid. If we see severe and prolonged lockdowns, this could negatively impact demand for oil.
There’s also some negative forecasts for economic growth in the West. That won’t be good for oil demand.
Should I buy Shell?
So, will I buy Shell stock? Despite the record quarter, no.
Firstly, I think we’re going to see some downward movement in the Shell share price in the coming weeks but that will probably depend on the outcome of the OPEC meeting in Vienna tomorrow.
Looking further ahead, I see China’s zero-Covid policy and negative economic forecasts in the West dragging the oil price down. As a result, I don’t see Shell going higher and I won’t be adding this stock to my portfolio.
