I’ve been toying with rekindling my exposure to hydrocarbons in recent months, but I be a little late. The Shell (LSE:SHEL) share price has surged over the past month, up 13.8%. So am I too late? Let’s take a look.
Higher prices & more oil
Shell has a diverse energy portfolio, but the stock rises and falls on the price of oil. And the general direction of Brent Crude prices has been upwards over the past month. The benchmark crude sat around $82 a month ago and is just below $90, at the time of writing.
Geopolitics plays a big factor in all of this. Russia’s war in Ukraine is a long-running factor pushing oil prices up as the risk of further escalations would put global osupply under threat. Likewise, the ongoing conflict in Gaza risks an escalation that could put the world’s most oil-rich area in turmoil.
Complementing higher oil prices are greater production volumes. In early April, Shell said it has raised its short-term production forecasts and added that it expects an increase in margins. This was coupled with increased production guidance for the first quarter.
For Q1, gas production’s now anticipated to be between 960,000 and 1m barrels of oil equivalent per day (kboe/d), exceeding its previous estimate of 930,000-990,000 kboe/d.
Similarly, upstream production is expected to fall within a narrower range of 1.82m-1.92m kboe/d compared to the prior guidance of 1.73m-1.93m kboe/d.
Higher for longer
The global energy landscape is on the cusp of a potentially transformative decade. In my opinion, it’s highly likely that oil prices will remain elevated versus the last decade. Why’s that? Well, here’s four macroeconomic reasons:
- Population Boom: The growth of the global population will likely translate into an increasing demand for energy resources
- Emerging Consumers: As developing economies mature, a burgeoning middle class will likely fuel greater demand for energy-intensive goods and services
- Slower Green Transition: We’re collectively moving towards greener energy sources slower than once anticipated, prolonging demand for hydrocarbons
- Less Easy Oil: Hydrocarbon resources aren’t as readily available as they once were. In turn, there’s greater competition and higher average extraction costs
This ‘higher for longer’ hypothesis could mean a period during which Shell experiences bumper revenues. The caveat here, of course, is that extraction costs could be higher. Nonetheless, I’d expect this to be an environment where Shell thrives.
Of course, economic shocks can send oil prices going in the opposite direction. This could be a short-term (but recurring) issue that wouldn’t be good for earnings.
A good option
I believe there’s precedent for Shell shares to trade higher. It trades at a premium to its European Big Oil peers for a reason — Eni and Total have poorer returns and BP is more heavily indebted. But it’s at a big price-to-earnings discount to its US peers.
Shell’s also undertaking a rationalisation programme, and plans to save a further $2bn in costs by 2025 — $1bn already saved. This comes as part of an effort to reduce the valuation gap between Shell and Exxon and Chevron.
With the US companies trading at a 30% premium to Shell on average, we could see the London-listed giant trade higher. I don’t think I’m too late to buy Shell shares for the long run, although there could be better entry points.
