Down 6%, is it time to consider this dirt cheap FTSE 100 powerhouse?

This FTSE 100 gem is at a substantial discount to its peers’ valuations, but has a great business in a vibrant sector, and offers good shareholder rewards.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

White female supervisor working at an oil rig

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 energy and petrochemicals giant Shell (LSE: SHEL) is down 6% from 8 March. I already have holdings in the stock, but I am thinking about increasing my position for three key reasons.

This is despite the risks that I can see in the stock. One of these is that lobbying by anti-oil groups may affect its operations. Another is that an accident at one of its sites may cause environmental damage, leading to severe fines.

Energy transition period underestimated

I am all in favour of a move away from fossil fuels, such as oil and gas. However, I think it will take a lot longer to achieve than many think.

In 2022, renewable energy comprised just 5.5% of the total global energy supply, according to the International Energy Agency (IEA). The same agency said that government pledges fall well short of achieving greenhouse gas ‘net zero’ by 2050.

Oil cartel OPEC believes that oil and gas will still be contributing 52% of the global energy mix by 2040.

These estimates are supportive of Shell’s core businesses, it seems to me. CEO Wael Sawan recently stated that it will keep oil production at 1.4m barrels per day until 2030. It will also expand its huge liquefied natural gas business.

On the other hand, the company is also at the forefront of the energy transition initiative. It plans to spend $10bn-$15bn by 2025 on low-carbon projects. It is also committed to achieving net zero emissions by 2050.

In short, whichever way the energy transition plays out, Shell will benefit, in my view.

Oil price on the rise

The Brent oil benchmark is currently at its highest level since 18 November last year. This also broadly supports gas prices, as historically 70% of its price is comprised of the price of oil.

Major support has come from ongoing oil production cuts from OPEC members and Russia (together, known as OPEC+).

OPEC leader Saudi Arabia announced on 5 September that its 1m barrel-per-day production cut will continue until the end of this year. Russia said it would extend its export cuts of 300,000 barrels per day for the same period.

These reductions add to the 3.66m bpd in collective cuts from OPEC+ since October 2022.

Decreases in production are broadly bullish for oil and gas prices, and this should also benefit Shell’s share price.

Valuations are compelling

Shell shares are currently trading at a price-to-earnings (P/E) ratio of 7.1. This is better than the other FTSE 100 big oil and gas firm BP at just 5.9.

However, to me, that is not the point — both are undervalued compared to many of their industry peers.

The US’s ExxonMobil has a P/E of 8.8, and Chevron’s is 10.3. Saudi Aramco’s is 16.2. Even considering the outlier in the group — Brazil’s troubled Petrobras — the peer average is 9.5.

Added to this compelling investment proposition mix for me is that Shell also pays a decent dividend.

After its stellar 2022 results, it increased the Q4 payout per share by 15% to 28.75 cents. This brought the annual total to $1.04. On the current share price of £26.13, this gives a yield of 3.17%. On 27 July, it also announced the start of a $3bn share buyback programme.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Bp P.l.c. and Shell Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Should I buy these UK shares for my portfolio?

This Fool has been searching for ways to capitalise on the commodity moves via UK shares. Here’s what he’s watching.

Read more »

Illustration of flames over a black background
Investing Articles

Just released: April’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£9,000 in savings? Here’s a FTSE 100 stock I’d buy to target a £30,652 annual second income!

Our writer highlights one top FTSE 100 share that he thinks could help create a portfolio large enough for a…

Read more »

Light bulb with growing tree.
Investing Articles

62% down! Is the Ceres Power share price now a green energy bargain?

Annual results from the green energy firm showed a company on the cusp of doubling sales. So why has the…

Read more »

Investing Articles

3 mid-cap UK defence shares to consider buying in 2024

Defence budgets are soaring as global conflicts increase the threat landscape, so I'm examining the value proposition of three defence-related…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Hargreaves Lansdown investors have been buying dividend stocks BP and Shell. Should I?

Cherished dividend stocks BP and Shell have outperformed the FTSE 100 index so far in 2024. Paul Summers takes a…

Read more »

Young Asian man shopping in a supermarket
Dividend Shares

A 5% yield? Here’s the 3-year dividend forecast for Tesco shares

Jon Smith flags up the positive momentum for Tesco shares following the release of the full-year results and looks at…

Read more »

Investing Articles

Yields up to 12.3% 3 top shares investors should consider for a second income

Searching for ways to make a market-beating second income? These popular dividend stocks are worth serious consideration, says Royston Wild.

Read more »