A few years ago everyone thought the oil sector was on its last legs, and the Shell (LSE: SHEL) share price was down in the dumps. But we’ve seen a resurgence since the lows of 2020, and in the past five years it’s soared 130%.
First-half results on Thursday (31 July) make me think Shell shares might still be cheap.
Adjusted earnings in the half fell 30% year on year to $9.84bn, largely due to a spell of lower oil prices. But the $4.26bn recorded for the second quarter comfortably beat analyst expectations for $3.87bn.
We’ll see another $3.5bn in share buybacks in the next three months. It marks Shell’s 15th successive quarter with buybacks of at least $3bn.
The share price spiked up 3.5% in early trading. But at the time of writing it’s softened to a gain of 2%.
In a press release, CEO Wael Sawan spoke of “robust cash flows reflecting strong operational performance in a less favourable macro environment.” He said: “Our continued focus on performance, discipline and simplification helped deliver $3.9 billion of structural cost reductions since 2022.”
Leaner business
This is a solid performance in a period of cheap oil, which dipped below $60 per barrel earlier this year. But we’ve been seeing prices rising more recently, now back up above $70. And with much of Shell’s cost reductions coming from factors other than disposals, I reckon future cash flow prospects look good.
Speculation in June over a possible takeover bid for BP pushed the Shell share price up. But the company quashed it, saying it had “not been actively considering making an offer for BP and confirms it has not made an approach to, and no talks have taken place with, BP with regards to a possible offer.”
The shares fell back, but since then have risen higher than that speculative push. I do still see possibilities for consolidation among the giants in the oil business, but I rate it a dangerous reason for investing.
The investment case
Shell looks attractive to me in its own right. I don’t see a forward price-to-earnings (P/E) ratio for this year of 12.2 as super cheap. But as the outlook clears, I wouldn’t be surprised to see forecasts for earnings per share (EPS) raised.
As it stands, analysts see EPS increasing nearly 70% between 2024 and 2027. I know a lot could change in that time, especially for oil prices. But it could send the P/E down under 8.5. The dividend yield, forecast at around 4% this year, would rise above 4.5%.
The main threat remains the ongoing shift to renewable energy. It might have slowed considerably since Donald Trump returned to power, but it has to get back on track eventually.
And as we’ve seen with various global flashpoints, geopolitical instability is another concern. But for income seekers, I’d say Shell deserves consideration.
