I have always been a firmer believer that truly outsized returns in the stock market come by taking a contrarian stance. Three years ago, when the oil price turned negative and many were advocating the demise of Shell (LSE:SHEL), I began building a position. As its share price has steadily risen since those dark days, I have not taken any profit. Instead, I have continued to buy.
Record cash flows
In its full-year results, Shell reported truly eye-watering numbers. Revenues hit $361bn, with contributions coming from every segment. The standout performer was natural gas, which saw revenues surge 80%.
Adjusted earnings more than doubled to $39.9bn. Cash flow from operations (CFFO) is another key metric. Shell’s policy is to return at least 35% of CFFO to shareholders. As this figure rose 52% on 2021, total shareholder returns amount to $26bn.
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Dividends have been hiked 15% to $0.2875 per share. That equates to a dividend yield of 3.9%. On top of that, it has announced a further $4bn share buyback programme.
Structural trends
Today, we have one of the most haphazard energy policies in history. Many blame the war in Ukraine for driving prices higher. While there is a great deal of truth in that, it does not tell the full picture.
I believe that the days of cheap energy are gone. In the short term, oil prices look oversold. Firstly, there is the reopening of China, the largest importer of oil in the world. Secondly, the US government is beginning to reverse its policy of dumping its strategic petroleum reserves on the market.
One of the biggest mistakes I believe many analysts are making is by adopting the 2008 playbook to determine the likely path for oil prices.
In the run up to the global financial crisis, oil hit $150 a barrel. When the world went into recession, oil prices collapsed.
Today, a recession looks almost a done deal. Surely, therefore, oil must be heading south? I believe not. The reason is simple. Since the shale boom of 2014, the industry has suffered from chronic under investment.
Just take one piece of evidence. On a five-month rolling average, the latest total of operating oil and gas rigs in the US has shown a steep decline toward the end of 2022. Supply has never been so constrained.
Risks
The risks of investing in Shell are pretty much known. One relates to whether the world has passed, or is close to passing, peak oil. If it is, then the company would be left with a number of stranded assets.
Over a decades-long timeframe, the world will slowly move away from hydrocarbons as a principal source of energy. Renewables like solar and wind will undoubtedly become a bigger part of the generation mix. My problem is that the technology here is very much in its infancy.
By accelerating the move away from oil before we have a stable and reliable source of energy to replace it, is one of the reasons why we find ourselves in the mess we are in now.
Therefore, I believe Shell will continue to thrive for many years to come, and why I continue to add more shares to my portfolio when finances allow.
