A lot of eyes are fixed on the Shell (LSE:SHEL) share price as we approach the firm’s highly anticipated capital markets day later this month. Shares of the oil & gas giant have been fairly stagnant over the past year, only rising by around 4%.
This holding pattern appears to be linked to both mixed results and investors eagerly awaiting the unveiling of CEO Wael Sawan’s next steps in the strategy to “deliver more value with less emissions”.
Yet that still hasn’t stopped some institutional analysts from speculating where the stock price could go by this time next year. And for the most part, sentiment appears to be quite bullish, with an average 12-month price target of 3,253.49p.
If these predictions prove accurate, then investing £1,000 right now could grow to £1,264 in a year’s time. And that’s before considering the extra gains from dividends paid over the period. But what’s driving these expectations?
Higher savings, lower profits
Income attributable to shareholders in 2024 shrank by 17% and came in lower than expectations. The cause wasn’t due to disruptions in production. In fact, the barrels of oil equivalents per day (boepd) expanded by 2% during the year. Instead, targets were missed on the back of falling oil & gas prices, resulting in its downstream margins getting squeezed.
However, despite earnings moving in the wrong direction, management seems to be getting its costs under control. Capital expenditure throughout the year actually came in lower than expected at $21.1bn versus the $22bn-$25bn investors were anticipating. This also marks a 13.6% reduction compared to 2023, enabling cash flow from operating activities to come in flat, rising by 1% even with lower profits.
Subsequently, management’s used this flexibility to pay down its debt from $81.5bn to $77.1bn. When factoring in the group’s spare cash & equivalents, Shell’s net debt position has fallen from $43.5bn to $38.8bn, improving the gearing from 18.8% to 17.7%.
These are all encouraging signs of a healthier balance sheet. And it likely explains why management was comfortable launching a new $3.5bn share buyback programme along with giving a 4% bump to dividends back in January.
What now?
Improved capital allocation and higher annualised savings are a welcome sight for shareholders. And should oil prices start rising again, Shell seems on track to become a leaner, more profitable operation in the long run.
However, it’s important to remember that oil prices are notoriously cyclical. In recent weeks, the price of hydrocarbons has been steadily falling, putting further pressure on Shell’s profit margins. And should this trend continue, 2025 could prove to be another challenging year.
Personally, I believe Shell has some interesting potential ahead, depending on the vision of Sawan. Investors will soon discover exactly what he has planned on 25 March during the capital markets day. So until then, I’m not rushing to add any Shell shares to my portfolio, even with bullish predictions coming from analysts.
