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As the price of oil falls, Shell (LSE:SHEL) share price follows inexorably. FTSE 100 Index The energy giant has fallen by 8.21% in the last month, leaving it trading at the same level as a year ago.
Shell's profits have plunged from a record $40 billion at the height of the global energy crisis in 2022 to $28.3 billion in 2023, a drop of a third. But that was the second-highest figure since 2011. So is the recent drop a buying opportunity?
Oil is a highly cyclical sector, so I prefer to buy when stocks are going down rather than when they are going up. I resisted chasing blood pressure and Shell rose when oil prices soared in 2022. By my own logic, I should jump in and buy them today.
How safe can we be with Shell?
With Shell shares trading at just 8.01 times earnings, roughly half the FTSE 100 average of 15.3 times, they look tempting.
Just because a company's stock price has fallen doesn't mean it can't fall further. There are good reasons for the oil company to be in crisis today: China's slowing economy is hurting demand, while a soft landing for the U.S. economy is far from guaranteed.
In addition, OPEC+ members appear willing to increase production, despite (or even because of) the current low price. This can only make the situation worse for producers. Last month, OPEC lowered its oil demand forecasts for 2024 and 2025.
Oil prices have rebounded slightly in recent days, with Brent crude trading as high as $73.16 a barrel. Investors are pinning their hopes on falling interest rates, which they hope will spur a global recovery. We'll see.
The good news is that Shell can break even with an oil price of just $30 a barrel. I don't think the price will fall anywhere near that level.
Numerous rewards for shareholders
Unfortunately, Shell is no longer the unstoppable earnings machine it once was. The cumulative yield of 4% is only marginally better than the FTSE 100 average of 3.8%. However, dividends per share have slowly recovered after falling back to 65 cents per share in 2020. Shell increased this figure to 89 cents in 2021, $1.04 in 2022 and $1.29 in 2023.
The board recently launched another $3.5 billion share buyback spanning just three months, so it clearly believes its shares are a good value.
Shell remains under fairly constant pressure from environmental activists, who want it to reduce fossil fuel production and invest more of its profits in renewable energy. The shift to electric cars has hit some bumps along the way, but the long-term direction remains clear and challenging for Shell.
stocks don't fall for no reason. Oil and gas production is a risky business at the best of times. I'm interested in buying Shell shares at the current price, but I accept that I may have to suffer short-term headaches before enjoying long-term gains.
