Shell (LSE: SHEL) shares have dropped 7% from their 12-month traded high of £28.43. This reflects lower benchmark oil prices over the year and poor Q2 results released on 31 July.
Adjusted earnings (net profit) hit $4.264bn (£3.17bn). This was ahead of consensus analysts’ forecasts of $3.74bn. However, it was still 32% lower than the same measure in Q2 2024, at $6.293bn. During that time, the average Brent benchmark oil price fell 21%, from $85 per barrel (pb) to $67pb.
The additional shortfall resulted from weaker trading in Shell’s integrated gas division and losses at its chemicals and products operations. The company had warned the markets of this in a trading update earlier in July.
The outlook from here
A key risk for the firm remains an extended period of lower oil and gas prices.
That said, consensus analysts’ forecasts are that its earnings will increase by 9.4% each year to the end of 2027. And it is growth here that is the engine for gains in any firm’s share price and dividends over time.
In this context, Shell’s Q2 results contained several operational positives, in my view. One of these was that it shipped its first liquefied natural gas (LNG) cargo from LNG Canada. This should support its target of achieving an LNG sales cumulative annual growth rate of 4-5% by 2030.
LNG has become the world’s emergency energy form after Russian oil and gas were sanctioned following its 2022 Ukraine invasion. It can be sourced, bought, and moved quickly anywhere in the world, unlike oil and gas moved through pipelines.
Given this, Shell forecasts global LNG demand will rise 60% by 2040. And it already has big LNG projects in 10 countries and 38m tonnes of its own capacity from 11 liquefaction plants.
Moreover, the firm’s operational cash flow in Q2 was £11.9bn, up 29% from the previous quarter. This can be a major driver for growth in itself.
Is the share price a bargain?
The first part of my share price assessment compares Shell’s key stock valuations with those of its competitors.
On the price-to-book ratio, its 1.2 number is bottom of its competitor group, which averages 2.4. These firms comprise ExxonMobil at 1.7, ConocoPhillips at 1.8, Chevron at 2.1, and Saudi Aramco at 3.9.
Shell is also bottom of this peer group on the price-to-sales ratio – at 0.8 against the 2.1 average.
And it is also a bargain at a price-to-earnings ratio of 15.3 compared to its competitors’ average of 16.5.
A discounted cash flow analysis shows Shell’s shares are 60% undervalued at their present price of £26.38. This model shows where any firm’s stock price should be trading, based on cash flow forecasts for the underlying business.
Therefore, their fair value is £65.95.
Will I buy more?
I believe Shell’s strong earnings growth prospects will drive up its share price and dividends over time.
Ultimately, my experience tells me that its price should converge with its fair value at some point. This is based on several years as a senior investment bank trader and decades as a private investor.
Consequently, I think it is certainly worth me buying more of the stock. And I will be doing so as soon as possible.
