Shell (LSE:SHEL) shares are up nearly 50% over the past 12 months. And this means that the oil giant is one of the fasting growing companies on the FTSE 100.
In fact, Shell is, depending on the day, the biggest UK-listed stock. It trades first and second place with AstraZeneca as share prices fluctuate.
But past performance isn’t indicative of Shell’s prospects going forward. Here’s why I’m not buying Shell shares just yet!
Soaring profits
Last week, Shell reported a better-than-expected second-quarter profit of $11.5bn, driven by soaring energy prices. Adjusted earnings rose 26% to $11.47bn, almost $500m higher than a company-compiled forecast.
Profits weren’t only driven by a higher spot price for crude oil. Shell’s refining profit margins tripled in the quarter to $28 per barrel.
The hydrocarbons giant also announced $6bn in share buybacks. Debt fell to $46.4bn at the end of June, compared with $48.5bn three months earlier.
Outlook
Shell’s profitability is largely dependent on the oil price and the margins it can make by refining products for the retail market.
And as a result, Shell’s share price has broadly followed fluctuations in the oil price over the past 12 months. Oil had been gaining this year with benchmarks extending above $120 a barrel in June.
Speaking last week, Shell CEO Ben van Beurden said he thought the oil market would stay tight, highlighting limited additional production capacity around the world.
However, not everyone agrees with van Beurden. Analysts at Citi suggest that the oil price could fall to $65 by the end of the year, and even as far as $45 next year, should the global economy contract. However, JP Morgan analysts have warned that crude oil prices could reach $380 if Russia were to cut production.
Personally, I see the oil price falling slightly this year amid economic slowdowns, but perhaps not as much as Citi suggests. China might be central to this. Monday’s PMI data wasn’t positive.
Would I buy Shell shares?
I wouldn’t buy Shell shares right now. And there’s a couple of reasons for this. Firstly, I do see the oil price falling, and it’s unlikely that Shell has capacity to produce more in an effort to maintain the current level of profitability; that’s not how this industry works.
But there’s also the windfall tax in the UK, and that could really hurt profits. The issue is, I don’t know how much it will impact Shell. The windfall tax on energy firms that could potentially raise around £5bn for the government, according to analysts.
However, in the long run, I think we’re entering a period of scarcity whereby oil prices, on average, will be higher than in the previous decade. And I think this will be positive for companies like Shell.
I wouldn’t buy now as I believe there will be better buying opportunities later in the year. However, I do see Shell being a good addition to my portfolio.
