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ShellThe (LSE:SHEL) share price has fallen 10% from its peak on 18 October this year. I think the main reason for this is the drop in oil prices during that period.
Of course, there are risks to the stock, one of which is a sustained decline in global commodity prices. Another is the government's clampdown on its operations due to the shift to greener energy.
However, in my opinion, this sell-off overlooks key factors supporting long-term share price gains.
And I am seriously considering increasing my holdings of Shell shares at the current discount level.
Oil prices change all the time.
Overall, oil prices have lost ground since late September due to lower demand from key buyers. But the global balance between supply and demand is constantly changing, and with it oil prices.
In the short term, any extension of the war between Israel and Hamas could cause prices to rise, for example. The World Bank recently said that the Brent benchmark price could soar to more than $150 a barrel in this case. Currently, it costs around $76.
In the long term, the transition to greener energy will likely take much longer than many analysts estimate. In October, OPEC forecast that global oil demand will rise to 116 million barrels per day (bpd) by 2045. It is currently around 100 million bpd.
The International Energy Agency recently added that governments' pledges fall far short of reaching “net zero” greenhouse gases by 2050.
Well positioned for the energy transition
Shell has both sides of the energy transition covered. For one thing, it pledged to keep oil production at 1.4 million bpd through 2030. It also said it will expand its huge liquefied natural gas business.
To this end, it continues to make new oil and gas discoveries, including several major oil finds in Namibia recently. It is estimated that together they contain at least 1.7 billion barrels of oil equivalent.
In February, it said its recent gas discovery in the UK's southern North Sea could be one of the largest in more than a decade.
This is in line with CEO Wael Sawan's intention to close the valuation gap between Shell and its US peers. Despite Joe Biden's greener US administration, these companies have remained committed to their core oil and gas businesses.
On the other hand, Shell aims to reduce its carbon emissions gradually: 20% by 2030, 45% by 2035 and 100% by 2050.
Meanwhile, on Nov. 2, it reported third-quarter earnings of $6.2 billion, up from $5.1 billion in the second quarter. Earnings per share of $1.06 increased from $0.93 in the third quarter of 2022.
Cheap vs. peers
Shell's price-earnings (P/E) ratio has improved since Sawan took over this year: from 4.9 at the end of 2022 to 7.1 now. But there's still plenty of room to go before it reaches the P/E valuations of its peers.
While Brazil Petrobras is low and is trading at 3.3, that of the US. ExxonMobil and Chevron are 9.7 and 10.7, respectively, and Saudi Arabian oil It is at 16.8.
Given the peer group average of 10.1, Shell appears highly undervalued.
To calculate how much, I applied the discounted cash flow (DCF) model, using several analysts' valuations and my own.
Shell's core valuations are undervalued by 26% to 40%. The lowest of these would give a fair value per share of £34.05, down from the current £25.20.
