Still at a discount to March’s high, Shell shares look cheap to me

A recommitment to its core business as oil and gas prices rise, plus great shareholder rewards and trading operations make Shell shares look cheap to me.

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Shell (LSE: SHEL) shares are trading nearly 8% below this year’s 8 March high. Given changing market and company circumstances, they look a bargain to me at this level.

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Oil and gas prices on the rise

Shell has one of the best in-house energy trading teams in the world. With access to unparalleled energy data, it can make as much money when energy prices fall as when they rise.

Indeed, according to oil industry estimates, the company’s trading operations contributed around 20% of its entire earnings in 2022.

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However, easier profits come when oil and gas prices just rise. They tend to do this together, as historically around 70% of the gas price is derived from the oil price. And oil prices are at their highest level since 26 April while the outlook is the most bullish in months.

Bullish supply and demand factors

Saudi Arabia announced on 4 June a 1m barrels per day (bpd) cut in its oil production for July. This came on top of the 3.66m bpd in collective cuts from the OPEC+ oil cartel implemented since October.

Production cuts boost oil prices and more may come after the 3 August meeting of OPEC+’s monitoring committee.

On the demand side, the world’s biggest net buyer of oil – China – may start buying more oil and gas soon. On 19 July, China’s National Development and Reform Commission pledged more support to boost growth.

And China’s President Xi Jinping has staked his reputation on economic growth this year of over the official 5% figure.

Recommitment to core business

Given these bullish factors for oil and gas prices, Shell’s recommitment to its core business is timely.

CEO Wael Sawan also believes it is crucial to closing the stock valuation gap between Shell and its US counterparts.

According to analysts’ estimates, Shell trades at around a 3.4 times ratio of share price to projected 2023 cash flows. US-based Chevron and Exxon trade at around 7.1 and 7.5 times, respectively.

Despite Joe Biden’s greener US Presidential Administration, these firms have remained committed to their core oil and gas businesses.

Sawan has underlined that Shell will keep oil production at 1.4m barrels per day until 2030. It will also expand its huge liquefied natural gas business.

As for the greener projects it had lined up, those that perform well will stay. Those that do not will be offloaded, which will also reduce costs.

Increasing shareholder rewards

After its stellar 2022 results, Shell increased the Q4 dividend per share by 15% to 28.75 cents. This brought the annual total to $1.04.

It also announced a share buyback of $4bn. Another $4bn of buybacks are planned for completion by the time of the Q2 results announcement on 27 July. This would bring total shareholder distributions to around $12bn for the first half of this year.

For me, the key risk in the Shell share price is that anti-oil lobbying may constrain its operations.

I already have holdings in the company, but if I did not I would buy it now. In my view, there is no reason why it will not recoup all its losses and then extend these gains. The dividends and buybacks are additional great rewards for holding the stock.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Shell Plc. 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.

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