Image source: Olaf Kraak via Shell plc
It's been another poor week for the Shell (LSE:SHEL) share price. London Stock Exchange Index (FTSE) 100 The oil and gas giant has fallen another 6.15% this week and is up a meager 2.28% over the past year.
That says little about Shell itself, but a lot about the global economy. A year ago, a barrel of Brent crude oil cost $90. Since then, it has fallen 21% to just $71, its lowest level in 15 months. You could say that, under the circumstances, Shell is doing quite well.
It is still making plenty of money and should continue to do so even if energy prices fall further, targeting new oil fields that can be profitable even with oil at $30 a barrel.
Can Shell prosper as oil prices fall?
Not only does this give Shell a safety net, but it also means that when the oil price eventually picks up, its margins will widen considerably. This is a cyclical sector and, in my view, it is always better to invest at the bottom of the cycle than at the top.
However, this doesn't necessarily mean we're at the bottom. Oil could fall even further. Axel Rudolph, senior technical analyst at online trading platform IG, says there are many factors working against it, including: “Supply ample, OPEC+ targets higher production quotas and world’s largest oil-importing economy China looks sluggish”.
On top of that, the US is battling a potential recession, while there is the long-term challenge of transitioning to net zero.
Fawad Razaqzada, market analyst at City Index, is also pessimistic. He warns that the “The oversupply will have to be offset by either a reduction in oil production or a sudden rebound in the global economic recovery. Neither of these scenarios seems likely or imminent.”.
Shell's valuation has reflected this outlook, with its shares trading at just 8.08 times earnings, well below the FTSE 100's current average of around 15 times.
Underperforming stocks
Adjusted second-quarter earnings for the three months ended June 30 fell 19% to $6.3 billion, though they beat forecasts of $5.9 billion. However, the board could still afford to reward investors by launching a $3.5 billion share buyback, paid for over three months.
I wish it would put more effort into its dividend, given today's mediocre 3.9% yield. There is room for improvement here, as it is comfortably covered by earnings at 3.2 times. The expected yield is 4.2%. And to be fair, the advice has been fairly forward-looking.
After resetting the annual dividend per share to $0.65 during the pandemic in 2020, it raised payments to 89 cents in 2021, $1.04 in 2022 and $1.29 in 2023. Management now aims to increase dividends by about 4% each year, with share buybacks on the side.
Buying Shell shares today would give me access to a steadily increasing income stream, at a discounted price. I could wait for them to go down even further, but knowing when the market will turn is never easy. A couple of positive pieces of data could send Shell tumbling.
I am looking forward to buying Shell and will do so as soon as I have the cash, with a deadline of November 14th when the shares will return to trading ex-dividend. I want that income!