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Has the Shell share price just become an unmissable FTSE 100 bargain?

The share price of FTSE 100 oil behemoth Shell (LSE: RDSB) has slumped 12% since late July. Over the same period, FTSE 250 oil equipment firm Hunting (LSE: HTG) has seen its shares fall over 20% (even with a 3.5% rise today on the back of its half-year results release). I think both companies have the potential to deliver strong returns for investors buying at today’s prices.

Hunting a bargain

Hunting today reported a 15% increase in first-half revenue to $509m, despite “the general market uncertainty within the oil and gas industry.” It saw growth in most of its bigger geographies, and product and service segments, with the exception of its large Hunting Titan business, where “challenging US onshore markets” adversely impacted revenue and margins.

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Group pre-tax profit increased 4% to $54.6m, but a higher tax charge saw the bottom-line slip lower, feeding into a 6% dip in earnings per share (EPS) to 24.6 cents. The company has maintained a strong balance sheet — net cash of $33.4m at the period end — and the board confidently increased the interim dividend 25% to 5 cents.

For the full year, I’m looking for EPS of around 50 cents (41p at current exchange rates), and a dividend of maybe 12 cents (9.8p). With the shares at 445p, as I’m writing, this would give a forward price-to-earnings (P/E) ratio of 10.9 and prospective dividend yield of 2.2%.

I rate the stock a ‘buy’ at this valuation, because I’m expecting a strong earnings performance next year, with management continuing to deliver on its strategy of “focused growth based on proprietary technology and ongoing lean manufacturing initiatives.” For example, a recent $12.5m bolt-on acquisition has added a strong product suite to the group’s offshore technology portfolio and gives it access to leading global deep-water projects.

Evolving Shell

Shell is another stock where we can expect a subdued earnings performance this year, followed by strong EPS growth next year. This will be helped by continuing share buybacks. Indeed analysts at Bank of America-Merrill Lynch reckon the company will crank up buybacks towards $12bn a year in the coming years, with potentially 30% of its shares repurchased by 2025.

As my colleague Roland Head commented in his review of the oil giant’s half-year results earlier this month: “Shell’s management is actively taking steps to position the company for a future when oil consumption is lower.” Share buybacks are part of this, protecting shareholder value, as management shrinks the business with lower investment in new oil assets.

At the same time, it’s developing its liquid natural gas, chemicals and marketing businesses, as well as new energies like biofuels and low-carbon electricity. In my opinion, it’s well positioned to evolve in the coming decades, as well as attractively valued on current earnings forecasts.

At a share price of 2,300p, City consensus expectations put the stock on a P/E of 11.7, with a prospective 6.7% dividend yield. Income seekers will love the yield, but with forecast EPS growth of 25% next year, there’s a growth story here too. The price-to-earnings growth (PEG) ratio for 2020 is 0.4, suggesting plenty of scope for the shares to re-rate higher. As such, I’d be happy to buy a slice of the business today.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.