Like most of the stock market, Shell (LSE: SHEL) shares bottomed out during the early days of the pandemic. But since then, the FTSE 100 firm has been on an absolute tear and shareholders have seen exceptional returns.
If I’d invested £2,000 in Shell shares in March 2020, I’d now have £4,844. That’s more than double in just over three years, a nice return.
The percentage increase was 142%, considerably higher than the average FTSE 100 rise of 39% – although dividend payments would boost that slightly.
Other oil companies like BP (91%) and ExxonMobil (195%) have done very well too. In short, shares in oil and gas firms have massively outperformed the markets.
Why is this? Well, the two main reasons were recovery from the pandemic and higher oil prices after Russia’s invasion of Ukraine.
Two reasons
The pandemic was a tough time for oil companies. Planes weren’t flying, people weren’t driving to work and so on. This meant demand for oil cratered and its price fell through the floor (even going negative at one point), so it’s no wonder Shell shares followed suit.
As things – and oil consumption – started getting back to normal after the pandemic, the invasion of Ukraine happened. Following this, a cocktail of sanctions was thrown at Russia which caused a surge in the price of oil. Shell benefited and made headlines with its record profits, the highest in its 115-year history.
I don’t own shares in Shell, so I didn’t get to enjoy these fabulous returns. However, I could still buy in today if I thought similar growth was on the horizon. So, let’s look at whether I think this is an attractive investment or not.
My main concern here is the long term. Oil is being phased out with many countries banning internal combustion engine vehicles by 2035 and having an overall net zero carbon emissions target for 2050. Simply, do I want to buy shares in a firm whose main money-spinner has a looming expiry date?
The future
I’m probably not the only one to think like this, and it’s reflected in the price. Despite its rise, Shell looks cheap at the moment, trading at five times earnings, which tells me other investors likely don’t see much of a future here either.
The thing is though, Shell styles itself as an energy company. It’s not all about oil and gas. And one line of thinking is that the green energy transition will likely be spearheaded by companies with the most resources.
So what’s Shell doing to move away from oil? The answer seems to be, not that much. The latest full-year results showed $25bn capital expenditure, of which only $3.5bn was on renewables. New oil and gas projects seem to be the priority.
What’s more, the firm recently abandoned its plans to cut oil extraction gradually over the next decade, and then CEO Wael Sawan went on the BBC and called cutting oil and gas production “dangerous and irresponsible”.
Putting it together, my concern is that these are shares I’d buy for a few years of tasty dividends and not much more. And while they do look cheap, a rough year has made a lot of the FTSE 100 look undervalued right now, so I’ll be looking at other cheap shares instead.
