Shell’s (LSE: SHEL) share price initially drifted lower after its 5 February Q4 2025 results release. The markets focused on softer headline earnings, ignoring the powerful underlying long-term engines of Upstream and Integrated Gas. These continue to generate huge, dependable cash flows.
Despite a subsequent stabilising of the share price, I believe these factors are still not fully reflected in it. So how undervalued do the shares look to me?
Earnings growth drivers
A risk to Shell is any environmental disaster that would be expensive in monetary and reputational terms. Even so, analysts forecast its earnings will grow an average of 7.1% a year to end-2028. These are ultimately what drive any company’s share price and dividends over time.
Shell’s Q4 figures give a clearer picture of what may drive that growth. Its Upstream division saw income surge 254% year on year to $3.65bn (£2.68bn), as oil production rose 5% to 1.393m barrels a day. Cash generation capacity stayed solid, with operating cash flow at $4.29bn versus $4.51bn in 2024.
Meanwhile, its Integrated Gas division saw liquefied natural gas (LNG) volumes rise 11% year on year to 7.81m tonnes. Meanwhile, LNG sales volumes jumped 28% to 19.8m tonnes.
That combination — higher oil & gas volumes even in a broadly softer market — is exactly what positions Shell for strong earnings growth when oil & gas pricing stabilises.
Aligned with the strategic reset
This operational stance is fully aligned with CEO Wael Sawan’s strategic reset announced in June 2023. This refocused the group on oil & gas developments.
The current project pipeline reflects this shift. In December, it approved the Gorgon Stage 3 development in Australia, adding long-life LNG volumes to an already growing portfolio. These include major expansion projects in Qatar, Nigeria, and the UAE.
The same month also saw Shell increase its stake in Brazil’s offshore Santos Basin’s Atapu and Mero oil projects. It also agreed an enhanced oil project at the Kaikias field in the Gulf of Mexico, further strengthening its future production base.
So what are the shares worth?
As a former senior investment bank trader, experience suggests the best stock valuation method to be discounted cash flow analysis. It produces a clear figure for how much a share is under- or overvalued.
To achieve this, it uses forecast earnings growth for a company to project future cash flows and then discounts them back to today. Some analysts’ DCF outcomes are more conservative than mine, and others are less so.
However, based on analysts’ consensus earnings growth forecast — and a 7.4% discount rate — my DCF modelling shows Shell is 33% undervalued at its current £28.78 price. Therefore, the ‘fair value’ of the shares is around £42.96.
And because asset prices gravitate towards their fair value over time, it implies a potentially superb buying opportunity to consider today if these forecasts prove accurate.
My investment view
Shell’s core cash-generating engines are still increasing volumes, the project pipeline is expanding, and the strategic reset is in full swing.
So with consensus forecasts of strong earnings expansion ahead and DCF modelling showing a major undervaluation, I will add to my holding in the firm soon.
