With Shell’s share price down 6%, is now the time for me to buy more?

Shell’s share price looks undervalued against its peers, and I believe it remains well-positioned in both the fossil fuel and green energy markets.

| More on:

Image source: Olaf Kraak via Shell plc

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.

Shell’s (LSE: SHEL) share price has fallen around 6% from its 13 May 12-month traded high of £29.56. Even before this, it looked undervalued against its competitor group, which is one reason I am increasing my holding.

Another is that the drop stems from a short-term decline in the oil price, in my view.

A dip in oil prices

As a former investment bank trader, I know that oil prices change constantly on a range of factors. The main one is changes in supply and demand.

Recent figures have shown the former outweighing the latter. However, oil supply is predicted to drop longer term due to declining infrastructure investment in line with the energy transition. This should be positive for oil prices.

On the other side of the equation, demand from China — the world’s largest oil importer — looks set to keep rising.

During its peak Covid years, its demand for oil fell as its economy struggled. However, last year, it comfortably achieved its 5%+ economic growth target.

Key economic data this year has surpassed consensus expectations and stimulus measures are still in place. This should also be positive for oil prices.

Balanced energy transition strategy

For the world’s power supply not to simply go off overnight, the energy transition must be sensibly managed. And there is a growing consensus that this will take a lot longer to achieve than many thought.

December 2023’s UN Climate Change Conference reiterated that net zero is targeted for 2050. But crucially it added that this must be done “in keeping with the science”.

So, Shell remains committed to a 100% carbon emissions reduction by 2050. But before that, 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.

This balanced strategy appears to be going well. Q1 results released on 2 May revealed adjusted earnings of $7.7bn. This was way ahead of consensus analysts’ forecasts of $6.46bn and outstripped the $7.3bn of the previous quarter.

Is it undervalued?

One risk in the shares is additional government pressure to speed up its energy transition. This would result in lost revenues from a still strong oil and gas market. Another is a sustained slump in global commodities prices. 

However, Shell is currently trading at a price-to-earnings (P/E) ratio of just 12.7. This is cheap compared to the peer group average of 14.4.

discounted cash flow analysis shows the share to be around 16% undervalued at its present price of £27.87.

Therefore, a fair value would be around £33.18, although this does not necessarily mean it will ever reach that level.

Aside from its apparent undervaluation and balanced energy strategy, Shell has also boosted its dividend.

Q1 saw a rise in its interim dividend to 34.4 cents (27p) a share from the previous 28.75 cents.

If this 19.7% increase were applied to the entire 2023 payout of $1.2935, then 2024’s dividend would be $1.5483 (£1.22).

On the current share price of £27.87, this would give a yield of 4.4%. This compares very favourably to the present average FTSE 100 yield of 3.8%.

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 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »