Shell (LSE: SHEL) shares have dipped 7% from their 26 March 12-month traded high of £28.43. This has largely reflected a decline in the global benchmark Brent oil price since that point.
Such a drop might be a good opportunity for me to add to my holding in the energy giant. That is provided the decline does not signal some fundamental reason why the underlying business should be worth less than before.
To find out what the case is here, I re-examined the business and ran the key numbers.
How does the energy market look?
It is earnings that essentially drive any firm’s share price (and dividends) over time. A risk to Shell’s is a sustained tilt in the oil and gas supply/demand balance that would cause price bearishness.
That said, the economy of the world’s largest net importer of crude oil and gas – China – appears to be improving. Its Q1 gross domestic product (GDP) increased 5.4% against analysts’ consensus forecasts for 5%. And Q2 GDP growth came in at 5.2%, again ahead of forecasts (of 5.1%).
China expects full-year economic expansion of 5% — the same as it achieved last year. However, I think it worth noting that even a 4.5% increase is equivalent to adding an economy the size of India’s to its own every four years.
Aside from this likely boost to demand, there are ongoing threats to the supply of oil and gas. The US and Europe continue to ratchet up sanctions aimed at reducing Russia’s once massive energy supplies to the world. And the same is true of OPEC’s third-largest oil producer, Iran.
Does the core business look solid?
Shell’s Q2 results were a mixed bag, in my view. On the one hand, adjusted earnings (net profit) were well ahead of market expectations – at $4.264bn (£3.17bn) compared to $3.74bn. But this was still 32% less than in Q2 2024.
On the more positive side, Shell shipped its first liquefied natural gas (LNG) cargo from LNG Canada. I think this augurs well for its target of an LNG sales cumulative annual growth rate of 4-5% by 2030. Moreover, its operational cash flow in Q2 increased 29% year on year, which can be a major driver for growth.
As it stands, analysts forecast that Shell’s earnings will grow by a very robust 9.5% a year to end-2027.
Are the shares going cheap right now?
On the price-to-sales ratio, Shell’s 0.8 is bottom of its peer group, which averages 2.1. These firms include ExxonMobil at 1.5, Chevron at 1.7, ConocoPhillips at 2.1, and Saudi Aramco at 3.3.
So, the shares look very cheap on this basis.
The same is true of their 1.2 price-to-book ratio compared to the 2.5 average of competitors. Again, it is bottom of this group.
And Shell is also cheap on the price-to-earnings measure, trading at 15.8 against its peers’ average of 17.1.
A discounted cash flow analysis shows the stock is 59% undervalued at its current £26.31 price.
Therefore, its fair value is £64.17.
Given this huge under-pricing to fair value and its strong earnings growth forecast, I think it is definitely worth me buying the stock. And this is what I will be doing as soon as possible.
