Image source: Olaf Kraak via Shell plc
It’s been another poor week for the Shell (LSE: SHEL) share price. The FTSE 100 oil and gas giant has fallen another 6.15% this week, and has grown a meagre 2.28% over the last year.
That says little about Shell itself, but an awful lot about the global economy. A barrel of Brent crude cost $90 one year ago. It’s fallen 21% since then to just $71, a 15-month low. Arguably, in these circumstances, Shell is doing quite well.
It’s still making lots of money and should continue to do so even if energy prices fall further, by targeting new oilfields that can be profitable even with oil at $30 per barrel.
Can Shell thrive while oil prices fall?
That doesn’t just give Shell a safety net. It’s also means that when the oil price finally picks up, its margins will widen nicely. This is a cyclical sector, and in my view, it’s always better to invest at the bottom of the cycle, rather than the top.
This doesn’t mean we’re necessarily at the bottom, though. Oil could fall further. Axel Rudolph, senior technical analyst at online trading platform IG, says a lot of things are working against it including “ample supply, OPEC+ aiming for higher production quotas and the world’s largest oil importing economy, China, looking sluggish”.
On top of that, the US is battling a potential recession, while there’s the long-term challenge of the shift to net zero.
Fawad Razaqzada, market analyst at City Index, is also downbeat. He warns that today’s “excess supply will need to be worked off either through reduced oil production or a sudden lift in global economic recovery. Neither of these scenarios appear likely or imminent”.
Shell’s valuation has priced in this view, as the stock trades at just 8.08 times earnings. That’s well below today’s FTSE 100 average of around 15 times.
Underperforming stock
Adjusted second quarter earnings for the three months to 30 June fell 19% to $6.3bn, although this beat forecasts of $5.9bn. Yet the board could still afford to reward investors by launching a $3.5bn share buyback, paid out over three months.
I wish it would put more effort into its dividend, given today’s so-so trailing yield of 3.9%. There’s scope for improvement here as it’s comfortably covered 3.2 times by earnings. The forecast yield is 4.2%. And to be fair, the board has been fairly progressive.
After re-basing the full-year dividend per share at $0.65 during the pandemic in 2020, it increased payouts to 89 cents in 2021, $1.04 in 2022 and $1.29 in 2023. Management is now aiming to increase dividends by around 4% every year, with buybacks on top.
Buying Shell shares today would give me access to a steadily rising income stream, at a reduced price. I could hang around for them to get even cheaper, but timing the market is never easy. A spot of positive data could light a rocket under Shell.
I’m keen to buy Shell and will do so as soon as I have the cash with a deadline of 14 November, when the shares next go ex-dividend. I want that income!
