What’s wrong with the Shell share price?

The Shell share price has gone nowhere for the past year. Now I’m wondering whether it’s ready for lift-off, or will continue to idle.

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As oil climbs above $80 a barrel on Red Sea tensions, I thought the Shell (LSE: SHEL) share price might also be on the up, but I was wrong.

Shell shares have declined almost 5% over the last three months. Measured over 12 months, they’re up just 0.87%. Longer term investors in the FTSE 100 gas and oil giant won’t be complaining though. The stock is up 82.47% over three years.

That jump was due to the energy shock, triggered by Russia’s invasion of Ukraine, which saw Brent crude touch $112 a barrel in June 2022. Shell can break even at around $30, so it’s still well in its comfort zone.

Does this stock offer good value?

Shell looks cheap, trading at just 7.38 times earnings, and I’m wondering whether today is a good one to buy. But why isn’t it doing better?

The £161bn giant enjoyed a strong end to 2023, with net Q4 adjusted earnings jumping 17.3% to $7.3bn year-on-year, smashing the anticipated $6.1bn. The results, published on 1 February, reflected “robust operational performance and strong LNG trading”, offset by lower refining margins and higher operating expenses.

The board noted that it had returned a total of $23bn to shareholders in 2023 via dividends and buy backs. It increased the dividend by 4% and announced a $3.5bn buyback programme for Q1 2024 alone.

I was intrigued to see the buyback will be funded by increasing debt, which is already a mighty $43.5bn. This seems a strange move, especially given today’s high interest rates. But, of course, everyone expects them to start falling soon. 

With forecast sales of a staggering $322bn, I can’t worry too much about this. Especially since analysts predict Shell’s net debt will fall to $35.8bn in 2024.

The Shell share price has idled since its Q4 results. While it has a growing renewables arm, its fortunes are still linked to fossil fuel prices, and investors are now waiting to see where they will go next.

It’s a cyclical thing

What happens in the Red Sea is unguessable. So it’s another key oil price driver, the state of the global economy. If the US tips into recession, energy prices could fall. On the other hand, with wildcat shale drillers responding to any oil price increased by ramping up production, there may be a cap on how high the price can go, barring geopolitical disaster.

Today, Shell yields 3.95% which is forecast to hit 4.34% in 2024. I can find far higher yields on the FTSE 100. It’s a personal thing, but I’ve never got as excited about share buybacks. I’m not convinced they offer long-term value, and would rather have the money paid straight to my trading account via a dividend.

Another concern is that while the share price is idling, this is on the back of a strong run. Shell may look cheap, but the oil price could go either way from here. I simply can’t get sufficiently excited to buy the stock today.

That would change if the oil price crashed though. Energy stocks are cyclical, and I prefer to buy them when they’re down. Just not today.

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.

Harvey Jones has no position in any of the shares mentioned. 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.

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