Shell (LSE:SHEL) shares can be volatile. But often this volatility has very little to do with operational performance. Instead, this volatility can be engendered by geopolitics, OPEC+ commentaries, economic data, and of course, changes in energy prices.
This can make the £170bn-behemoth something of a risk to invest in. Previously, I’d spoken about avoiding oil stocks because of this volatility. But I’ve had a change of heart in recent weeks.
I think there’s plenty of value in Shell. But it requires us to look beyond the near term. The medium-to-long term macroeconomic picture is strong.
Let’s take a closer look.
Value in hydrocarbons
Shell isn’t expensive. It trades for around 7.65 times earnings — that’s just above half the index average. But it’s worth remembering that cyclical stocks, like energy, mining/ and banks tend to trade at a discount versus the index average.
While there are certainly cyclical pressures on oil stocks, I do think there’s increasing need for hydrocarbons in our transitioning world.
I believe that we’re entering a period of increased scarcity, characterised by greater competition for resources. This could be particularly apparent around energy. As such, I’m expecting to see higher average energy prices in the decade to come than we’ve seen over the decade passed.
We’re not just talking about increasing demand from the US or China, but developing economies, including India, Indonesia, and Malaysia.
For example, Indonesia’s energy demand is expected to double by 2030, from 1,648m barrel oil equivalents (boe BOE) in 2016 to 3,221m BOE in 2030. There will be increasing need for cleaner fuels, like gas, rather than oil, but the basic energy requirement in developing nations is on an upward trajectory.
It’s also worth noting that renewable investments, which Shell is undertaking, are increasingly profitable. The medium-to-long term energy market is attractive.
Finding an entry point
So, I think Shell will be able to sell its products at a premium over the next decade. That’s a good starting point. But while I don’t like the current volatility, it does make it easier to find attractive entry points.
In March, the stock fell below £22.50 — it was a fall of around 15% over the course of just a few days. It was a good entry point and I should have bought in. Unfortunately, I was more focused on banking stocks at the time as the SVB fiasco created new opportunities.
After recent OPEC+ cuts, some analysts suggested we could see oil exceeding $100 a barrel in the near future. But the jury is out on that. If we see further weakening in the oil price, there could be more downward pressure on the share price, and importantly, a good entry point.
And several big banks have suggested commodity prices will fall. After all, there’s a US recession on the cards and continued negative economic data will have an impact on energy forecasts.
Volatility is the biggest issue here for me, that’s why I’m keen to find the best entry point.
