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In June last year, I took a long hard look at Shell (LSE: SHEL). Brent crude had just dipped to around $77, down from almost $95 in September 2023.
Inevitably, that spelled trouble for the FTSE 100 oil & gas giant. It had made a bumper pre-tax profit of $64.8bn in 2022, the year Russia’s invasion of Ukraine triggered an energy shock.
That roughly halved to $32.6bn in 2023, as energy prices retreated. Yet the Shell share price held up pretty well. Investors were benefiting from around $3bn of share buybacks a quarter, and were in no mood to move on.
Shell traded on a forward price-to-earnings (P/E) ratio of just 8.72 at the time and I thought there might be an opportunity. Broker Berenberg seemed to agree, raising its price target from 2,950p to 3,400p. Shell traded at 2,787p back then. If Berenberg had called it right, the shares would have risen 22% by now. But they didn’t.
No quick wins
As oil continued its slide, the group’s pre-tax profits slipped again in 2024, to $29.9bn. Over the last 12 months, Shell’s share price has dropped 6%. That would have reduced a £10k investment to £9,400, a paper loss of £600. However, investors would have picked up a 4% dividend yield, trimming that loss to just £200. Not ideal, but hardly a disaster.
At The Motley Fool, we play investing as a long game. Nobody gets every call right. There’s still plenty of time for this one to prove its merit.
Solid foundations
There were signs of resilience in Shell’s Q1 results on 2 May. Adjusted earnings hit $5.6bn, with $11.9bn in cashflow from operations. The acquisition of Pavilion Energy has strengthened Shell’s liquefied natural gas (LNG) business, while divestments in Nigeria and Singapore helped tidy the portfolio.
Shareholder returns are on track too. Q1 marked Shell’s 14th consecutive quarter of at least $3bn in buybacks.
Shell needs energy prices to firm up if the shares are going to kick on. Brent has been bobbing around $65 mark in recent weeks. In recent days, it’s climbed towards $70bn, driven by concerns around US-Iran nuclear negotiations. Any deal there could unlock more Iranian oil, which may push prices lower. That deal’s looking less likely for now.
Patience might pay off
Today, Shell trades on a P/E ratio of 9.3 times, slightly pricier than a year ago. Big risks remain, namely the global economy’s slowing and the Net Zero transition adds another layer of complexity. Shell’s dividend yield, once a big draw, was rebased in 2021 and now sits at around 4%. Decent, but not irresistible.
Even so, brokers remain keen. Of 32 analysts with one-year ratings, 23 call it a Strong Buy, four say Buy, and five Hold. Not one says Sell. The median one-year target’s 3,033p, about 16% above today’s 2,613p. Add the 2025 forecast yield of 4.14% and that gives a total return just over 20%, if correct.
Ironically, that’s roughly what Berenberg forecast a year ago. So don’t take these things too seriously.
I’ve already got exposure to the oil recovery via BP, which has had a choppier ride than Shell lately. But long-term investors might consider buying Shell today. It looks like a solid business at a low ebb. Worth a look – after doing the research.
