Shell’s (LSE: SHEL) share price has fallen 17% from its 13 May 12-month traded high of £29.56.
Most of this resulted from the 2 April US tariffs announcement that analysts fear may cause a global recession. This in turn could reduce oil and gas demand, which would push prices lower if supply did not also fall.
Additional weakness came from the firm’s cut in its Q1 liquefied natural gas (LNG) output forecast announced on 7 April.
My question here is whether I should buy more of the stock on this dip?
Are the bearish factors permanent?
As a former senior investment bank trader, I targeted shorter-term profits rather than longer-term ones. As a longtime private investor nowadays, it is the other way around.
Consequently, when considering buying any stock on a dip I look at how long the factors that pushed it down will last.
On the first factor, the US’s National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months”. There is currently no recession in the US or globally.
Even if one does occur, they tend to be much shorter than many investors might imagine. The average US recession lasted around 17 months in the period from 1854 to 2020, according to the NBER.
Consequently, as a long-term investor I am not unduly concerned about whether there is a global recession or not. I have a well-diversified portfolio in high-quality stocks bought at significant discounts to what I see as their fair value. It was constructed with a risk-reward balance that can withstand major increases in volatility.
That said, a long-term bearish market for oil and gas does remain a risk for the firm.
I am also not that bothered either by Shell’s lower LNG forecast for Q1 for two reasons. First, it is just for one quarter. And second, it results from the transitory reasons of cyclones and resulting unplanned maintenance in Australia.
How much value is there now in the stock?
Value is not the same thing as price. And in my experience it is in the difference between the two that serious long-term profits are to be found.
At Shell’s current price of £24.45, a discounted cash flow valuation shows it is 58% undervalued. This analysis highlights where any firm’s share price should be, based on future cash flow projections for it.
Therefore, the fair value of Shell shares is £58.21, although market vagaries could push them lower or higher, of course.
Underscoring the huge value in the stock are its key ratios relative to its competitors, in my view
Its 11.7 price-to-earnings ratio is bottom of its peer group, which averages 13.7. This comprises ConocoPhillips at 11.9, ExxonMobil at 13.3, Chevron at 13.5, and Saudi Aramco at 15.9.
It is also bottom of the group on the price-to-sales and price-to-book ratios.
Will I buy more?
The key driver over the long term for any company’s share price (and dividend) is earnings growth. For Shell, analysts forecast this will be 7.2% every year to the end of 2027.
Given this and the already huge share price undervaluation in my view, I will buy more of the stock very soon.
