The FTSE 100 is down around 2% over 12 months, but during that period Shell (LSE:SHEL) is up a massive 45%. The stock has gained on the back of surging oil and gas prices, and this has been reflected in record profits in multiple quarters.
But now we’re starting to see some downward pressure on oil and gas, with Brent Crude prices falling around 30p from their summer highs. Natural gas prices have fallen even further. So should I buy Shell shares or have I missed this bull run entirely?
A two-year bull run
Shell shares are up 154% over two years. If I had invested during the height of the pandemic, my returns would be massive. However, many analysts, myself included, didn’t expect oil to come back quite so strongly.
What’s going on with energy prices?
Shell’s profits are tied to movements in oil and gas prices. Generally, the more expensive oil becomes, the greater profits of hydrocarbons companies. However, the sector tends to wax and wane with the global economy.
Natural gas prices have fallen around 70% from their highs in the summer. That’s substantial, but analysts at Goldman Sach believe there is further to go, predicting a further 35% decrease in the winter months.
Oil could be more resilient, but with the global economy is decline, demand is waning. And this is why OPEC+ is reducing oil production to keep prices at profitable levels.
Will the bull run last?
Personally, I see further downward pressure on hydrocarbons and this won’t be good for Shell. The firm breaks even when oil prices are above $60.51 per barrel, but it’s worth noting that some wells/hydrocarbons assets are cheaper to operate than others.
Lower prices are already making an impact. In late October, Shell reported operating profits of $9.5bn for the third quarter. The figure is lower than the three months before, but still more than double the same period in 2021.
It seems unlikely that the recent period of record profits will continue. But this period has allowed Shell to reduce its debt burden. Net debt climbed to about 2.5 times cash profits in 2020, but total debt has now been reduced by 17% while profits have soared.
Long-run prospects
I’m pretty bullish on the long-term prospects for Shell, but I wouldn’t buy this stock now — I think there will be better entry points in 2023 as demand for hydrocarbons weakens.
But I also contend that we’re entering a period of increased scarcity, characterised by greater competition for resource, particularly those associated with energy. As such, I think we could see higher average oil and gas prices in the decade to come than we have done over the previous decade.
And while other energy firms are looking increasingly at renewables, Shell is arguably more focused on the black stuff. The group’s said it expects oil production to decline by 1-2% each year this decade. As a result, I expect Shell to be highly profitable in the years following this current economic decline.
