Shell’s (LSE: SHEL) share price has tracked oil prices lower recently, which might mean the stock is a bargain now.
Whether it is depends not on the price itself, but on how much value remains in the business. Price is simply what the market will pay, while value reflects the true worth of a company’s fundamentals.
Over the long run, share prices tend to converge with that underlying value. This makes the gap between the two critical for long-term profits.
So, is there a price‑to‑value gap here – and if so, how wide might it be?
Earnings growth is key
Earnings (or ‘profits’) growth powers any firm’s share price over time. This builds cash flow for expanding operations, reducing debt, and increasing shareholder rewards. If done efficiently all these factors are share-price supportive.
A risk to Shell is an enduring period of bearish oil and gas prices. However, analysts forecast its earnings will grow a robust 8.5% a year to end-2027.
What stands out for Shell is its ability to generate consistent cash flow even when profits dip.
For example, Q2 2025’s adjusted earnings fell 32% year on year to $4.264bn (£3.17bn). But it still produced nearly $12bn in operating cash flow — enough to fund dividends and buybacks without stretching its balance sheet.
By Q3, earnings rebounded to $5.4bn, driven by stronger trading and operational performance. This underlined to me how quickly Shell can recover when market conditions improve.
Price-to-value gap
Comparisons of key stock measures with competitors can prove a useful framework for valuation.
In Shell’s case, its 0.8 price-to-sales ratio is bottom of its peer group, which averages 2.1. These firms comprise ExxonMobil at 1.5, Chevron at 1.6, ConocoPhillips at 1.9, and Saudi Aramco at 3.5.
So, it is a bargain on this basis.
The same is true of its 14.4 price-to-earnings ratio against its competitor’s average of 17.3. And it is also true of Shell’s 1.2 price-to-book ratio compared to its peer average of 2.3.
However, the key valuation test to me is the discounted cash flow model. This identifies the price at which any stock should trade, based on cash flow forecasts for the underlying business.
In Shell’s case, it shows the stock is 53% undervalued at its current £26.88 share price.
Therefore, its true value (or ‘fair value’) is £57.19.
My investment view
I think a major turning point for Shell’s valuation came with the strategic reset announced by CEO Wael Sawan in June 2023. This involved cutting costs, shedding weaker renewables, refocusing on gas and oil, reducing debt, and boosting shareholder returns.
He argued Shell’s valuation lagged its peers because it leaned on renewables while rivals stuck to fossil fuels.
The reset culminated in updates at Shell’s Capital Markets Day in March 2025. Here, Sawan reaffirmed liquefied natural gas (LNG) as the firm’s growth engine and operational simplification as the guiding principle.
As of now, Shell is progressing with major LNG expansion projects in Qatar, Nigeria, Australia, and the UAE. These are central to Sawan’s strategy of positioning Shell as the world’s leading integrated gas player.
I think these will be successful, driving earnings higher, and the stock price too.
As such, I will be adding to my holding in the firm very soon.
