The Shell (LSE: SHEL) share price has risen 22% in the past five years. And the 10% dip in adjusted earnings per share (EPS) for 2024 reported on 30 January didn’t throw it off course.
Most of the drop came in the fourth quarter, which saw EPS down 38% from the previous quarter. It was affected by a number of specific things, including higher exploration well write-offs, lower margins and lower oil prices.
Cash still looks healthy, as Shell lifted its full-year dividend by 7%, and revealed a new $3.5bn share buyback programme. That makes it the 13th consecutive quarter with buybacks of at least $3bn.
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Cash flow
CEO Wael Sawan said: “Despite the lower earnings this quarter, cash delivery remained solid and we generated free cash flow of $40bn across the year, higher than 2023, in a lower price environment.”
He added: “Our continued focus on simplification helped to deliver over $3bn in structural cost reductions since 2022, meeting our target ahead of schedule.”
Despite the five-year price rise, we’re still looking at a 4.3% dividend yield for 2024. Does that make it a buy now? If the dividend keeps rising, and future buybacks lift per-share measures further, I’d say it has to be worth considering. But could future dividends suffer under the threat of a price war?
Oil prices
President Trump told the World Economic Forum in Davos that he wants OPEC countries to lower oil prices. Whether he’ll be successful in that is open to question. But even just ramping up US exploration and production could have the effect he desires. And oil has already fallen back from the gains of the final weeks of 2024.
Then there’s the longer-term threat from efforts to wean the planet off fossil fuels. The political will to get carbon emissions down has clearly been weakening. But the rise of record storms and wildfires, attributed in part to human-driven climate change, shows the problem isn’t going away.
There’s a key question for investors to ask here. Are the short-term and long-term threats already accounted for in the Shell share price? I think they just might be.
Valuation
Forecasts suggest a 2025 price-to-earnings (P/E) ratio of about 8.7. Shell recorded a rise in debt to $38.8bn in the fourth quarter, and adjusting for that would push the effective P/E up to 10.4. Is that too much?
The City doesn’t think so. There’s a strong buy consensus among 15 analysts, with a price target of around £32. With Shell shares trading at £26.20 as I write, that could mean a 22% increase.
I think investors considering buying Shell shares need to weigh a number of factors. Higher oil production could mean lower prices. But higher volumes also mean higher revenues. Demand is also a bit weak now, especially from a sluggish China. In the long term, these things tend to even out.
How long the long term really is for oil is a tricky question. But it’s surely not going away soon. Shell is on my buy candidates list.
