Shell Share Price Still Below 12-Month Highs: Should I Buy More?

ShellSince mid-December, the company’s share price (LSE: SHEL) has almost exactly tracked the benchmark Brent crude oil price.

Oil Price Outlook

So obviously a lot FTSE100 investors seem to see the company as simply an oil price play. So for them, a bullish oil market outlook could prompt further buying of Shell shares, which would drive up the price.

I think it’s entirely possible. In early June, OPEC+ extended its production cuts by 3.66 million barrels per day (bpd) until the end of 2025. The oil cartel will extend another 2.2 million bpd until the end of September 2024.

Demand is also expected to increase from the world’s largest oil importer, China. The International Energy Agency (IEA) forecasts that oil consumption will increase by 510,000 barrels per day this year.

Reducing supply while increasing demand tends to support the price of crude oil.

The risk for Shell shares is that this supply-demand imbalance will reverse sooner or later.

Another is the government’s push to accelerate energy transformation. That would mean losing revenue from the still-strong oil and gas market.

The Relative Valuation Game?

While part of Shell’s share price is tied to the price of oil, I think there are other elements to consider.

One is the valuation discrepancy between Shell and its international peers.

More specifically, the British company values ​​the shares at a key price-to-earnings (P/E) ratio of 12.6.

This is a low value compared to the average P/E value of companies from the same group, which is 14.

To see just how cheap this is, I ran a discounted cash flow analysis using data from several other analysts and my own.

This shows that Shell shares are around 17% undervalued at their current price of £28.35. Fair value would therefore be around £34.16.

However, that doesn’t necessarily mean they will ever reach that price. However, it highlights to me how cheap they look compared to their peers.

Increasing shareholder rewards

Likely to help close this valuation gap, Shell recently increased the amount of dividends to shareholders.

In the first quarter it rose by as much as 19.7% to 34.4 cents (27 pence) from the previous level of 28.75 cents.

If this rate were applied to the entire 2023 payment of $1.2935, the 2024 dividend would be $1.5483 (£1.22).

At the current share price of £28.35, that would be a yield of 4.3%. That compares very favourably with the current average FTSE100 efficiency 3.6%.

On May 2, Shell also announced the launch of a $3.5 billion share repurchase program, which is scheduled to end on August 1. Buybacks typically support a company’s share price.

Will I buy more?

Both initiatives come after the company announced first-quarter adjusted earnings of $7.7 billion — significantly exceeding analysts’ consensus expectations of $6.5 billion.

Currently, forecasts say that Shell’s profits will grow at an annual rate of 5.6% by the end of 2027. Earnings per share are expected to grow 9.3% annually through that point. Return on equity is expected to be 12.6% by then.

This should result in future increases in dividends and share prices.

I will therefore increase my share holdings in Shell at the earliest opportunity.