Shell’s (LSE: SHEL) share price has lost out in recent years to several of its competitors over energy transition plans. Broadly, it had adopted bigger carbon reduction targets by earlier dates than many of its peers, especially in the US.
Many American oil firms have remained committed to their oil and gas operations. And their valuations have benefitted ahead of Shell’s.
The key reason for this is the view in the financial markets that the energy transition will take much longer than many think. Consequently, the argument runs, any company that reduces fossil fuel production too early will miss out on major profits.
Unsurprisingly then, Shell’s 14 March announcement that it is pushing back its carbon reduction targets boosted its share price.
So, a reintroduction of its earlier energy transition plans due to government pressure is a risk for the shares. Another is an extended slump in commodities prices.
A more pragmatic energy transition plan
Shell is now targeting a 15%-20% net carbon cut by 2030 compared to 2016 levels. Previously, it intended to achieve a 20% cut by 2030.
It also scrapped the previous 45% net carbon reduction target for 2035. But it remains committed to a 100% net carbon cut by 2050.
It cited “uncertainty in the pace of change in the energy transition” as the reason for these changes.
This aligns with the final statement from December 2023’s UN Climate Change Conference. It didn’t include anything about phasing out fossil fuels entirely. And it added that although net zero emissions remains the 2050 target, it must be done “in keeping with the science”.
Shell has said it will keep its oil production at 1.4m bpd until 2030. It will also expand its huge liquefied natural gas business, with forecasts that demand will rise over 50% by 2040.
Its Q4 2023 results showed adjusted earnings of $28.25bn against consensus analysts’ expectations of $26.82bn. Expectations now are that earnings per share will grow by 9.5% a year to end-2026.
Still undervalued?
On the key price-to-earnings (P/E) stock value measurement, Shell trades at 11. This is very undervalued against its peer group average of 14.
The big American oil firms – ExxonMobil, ConocoPhillips, and Chevron – are still ahead and are trading, respectively, at 12.5, 13.1, and 13.6. Saudi Arabian Oil is further ahead at 16.8.
BP is not in Shell’s immediate peer group due to its smaller operational scope and size. But it trades at a P/E currently of 6.9, partly due to its more balanced energy transition strategy, I think.
A subsequent discounted cash flow analysis shows the stock to be around 28% undervalued at its present price of £25.93. So a fair value would be around £36.01, although it may never reach that price.
Added impetus for share price rises should come from a new $3.5bn buyback programme to be completed by 2 May.
Additionally positive for the stock is that it currently pays a dividend yield of 3.9% — in line with the FTSE 100 average.
As I bought Shell stock much lower than the current price, I am happy with my holding.
If I did not have this, I would buy the shares now for the strong core business, potential price gains and the decent dividend thrown in.
