Shell’s (LSE: SHEL) share price rose nearly 2% yesterday (7 October) on a bullish Q3 outlook.
The global oil and gas major said it projects that its key integrated gas division’s trading and optimisation will be “significantly higher than Q2 2025”.
‘Optimisation’ here refers to how well it manages these gas resources to maximise profits. This includes effectively routing liquefied natural gas (LNG) shipments, and storage strategies geared to market supply and demand shifts.
More specifically, Shell raised its overall Q3 gas production forecast to 910,000-950,000 barrels of oil equivalent per day (boepd). Previously it was 913,000 boepd.
The ‘oil equivalent’ measure reflects the energy content of different fuels (such as gas) in terms of one crude oil barrel’s worth of energy.
It also increased its LNG liquefaction volumes for the same period to 7m-7.4m tonnes from 6.7m.
The firm’s upstream production (including oil and gas) is now forecast at 1.79m-1.89m boepd, up from 1.7m-1.9m boepd. Moreover, its refining margin is anticipated to be $11.60 (£8.66) per barrel in Q3, up from $8.90 in Q2.
Gauging the price-valuation gap
I found early on in investing that the best method to identify any stock’s true value is through discounted cash flow analysis.
This pinpoints the price at which any share should be trading, based on cash flow forecasts for the underlying business.
In Shell’s case, it shows the shares are 45% undervalued at their £27.79 current price.
This means that their fair value is £50.53.
Secondary confirmations of this price-value gap are seen in comparisons with its competitors’ key share valuations.
For example, Shell’s 0.8 price-to-sales ratio is bottom of its peer group, which averages 2.1. These firms comprise ExxonMobil at 1.4, Chevron at 1.7, ConocoPhillips at 2, and Saudi Aramco at 3.4. So, Shell is extremely cheap on this basis as well.
What do the business fundamentals look like?
At a sectoral level, Shell’s share price tends to track the global oil benchmarks. Gas prices are also heavily influenced by these, as the two are often competing global energy sources.
The benchmarks see-saw all the time, based on the changing balance of world oil supply and demand dynamics.
Short term, the Energy Information Administration expects Brent prices to fall. Specifically, it expects a decline from an average of $68 per barrel (pb) this year to $51 pb next year.
However, longer term the International Energy Agency expects world oil supply to stagnate in 2029 and fall significantly from 2020.
On the demand side, the world’s biggest net oil and gas importer – China – is seeing strong economic growth trends. It achieved its 5% year-on-year annual economic growth target last year and has the same target this year. Q1 saw it hit the 5.4% level, and Q2 saw 5.2% — ahead of market projections of 5.1%.
A risk for Shell is an extended bearish trend in oil prices.
That said, consensus analysts’ forecasts are that its earnings will grow by an average of 9.5% a year to end-2027.
And it is ultimately growth here that drives any company’s share price (and dividends) higher over time.
I believe that Shell will be no exception to this, so will increase my holding in the firm very shortly.
