The Shell (LSE :SHEL) share price is down 3% since issuing a profit warning earlier this month. The warning outlined a potential $2bn impairment charge in its next earnings results.
The impairment comes after the oil giant was forced to cease operations at a biofuel plant in Rotterdam. This was further compounded by losses from the sale of a refining plant in Singapore.
But it’s a small dent in a share price that recently hit an all-time high of almost £30 in May this year. So could this latest development derail the company’s progress — and what other factors are at stake?
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Climate controversy
Renewable energy efforts and emission reduction targets are proving difficult for oil companies lately. Both Shell and BP have recently scaled back plans related to renewable energy projects and reduced emission targets.
Precisely how unprofitable these initiatives are is unclear but it seems shareholder interests take priority. It’s not a great look — and the ongoing problems with Shell’s Niger Delta operations don’t help. That’s a whole other can of worms I’d rather not dive into.
Shell has already been implicated in a scandal involving carbon credit abuses. The last thing it needs now is further scrutiny of such activities.
But without further government pressure to properly address these issues, they may pass by without hurting the share price.
Supply and demand
Last month, OPEC+ agreed on a new deal to extend output cuts of 3.66M barrels per day (bpd) until the end of 2025. This is partly due to subdued economic activity in Western nations as a result of delayed interest rate cuts.
But the International Energy Agency (IEA) expects demand in China to increase, making a strong case for oil prices to continue rising. Shell has been tracking the price of Brent crude fairly consistently throughout this year, so the share price could follow suit.
But it could also take a completely different trajectory. Checking the company’s valuation may provide a clearer picture.
Good value?
With the share price hitting new highs recently, there’s some expectation for it to be overvalued. However, using a discounted cash flow model, analysts estimate the shares to be trading at 28% below fair value. Strong earnings have kept the price-to-earnings (P/E) ratio down at 12.9, slightly higher than the industry average but below the UK market average.
But with lacklustre earnings in its latest results, I’m not sure undervaluation metrics are enough to go on. The latest impairment warning could shake shareholders’ confidence just enough to cause a price reversal. And if supplies of non-OPEC oil in China reduce demand, it could compound the losses.
Until now, Shell has had a good year but how long that can continue is my question. There are several factors that, when combined, would put a lot of pressure on any further price growth. However, the chances of those factors all coming together in a perfect storm are unlikely.
As I continue to search for more promising renewable energy shares, I will keep a close eye on Shell. For now, it remains a part of my portfolio — but it’s skating on thin ice. Sure, it’s a mega-cap energy giant but I’m no longer convinced it’s the strong buy it was once.
