3 Reasons Shell Remains A Buy

seekingalpha05-12

Shell's stock price has seen a healthy rise so far this year, and this can continue due to three supporting factors.An expected increase in oil prices can boost its earnings. The company's recent ...

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The company's recent ...</p>\n\n<a href=\"https://seekingalpha.com/article/4692455-3-reasons-shell-remains-a-buy\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU2236285917.USD","symbol_name":"ALLIANZ GLOBAL INCOME \"AMG\" (USD) INC","start_time":0,"source_url":"https://seekingalpha.com/article/4692455-3-reasons-shell-remains-a-buy","article_id":"2434389409","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1354399133/image_1354399133.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2434389409","pubTimestamp":1715490294,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Shell's stock price has seen a healthy rise so far this year, and this can continue due to three supporting factors.An expected increase in oil prices can boost its earnings. 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The company's recent results haven't disappointed investors either, with a sequential earnings improvements. And its P/E is still attractive.There's a risk from a weakness in the US economy, which can slow down demand. But how big a risk this is remains to be seen.   blinow61/iStock Editorial via Getty Images Since I last wrote about oil producer Shell (NYSE:SHEL) (OTCPK:RYDAF) in February, its price is up by 17%. The upside to the stock was visible even then despite its weak results for 2023, risks to the macroeconomy and prospects for oil prices. The stock's attributes were the reason for this bullishness. Shell's market multiples were attractive and share buybacks as well as dividend increases added to that. Cut to now, there are even more reasons that support the stock, albeit with risks on the rise too. Here are three reasons why Shell can continue to see an uptick. #1. Oil price supports  Much of the price increase for Shell year-to-date [YTD] has been seen from early March onwards. This coincides with the rise in oil prices as is evident in the chart below, which maps out prices for Shell with its other UK based counterpart, BP (BP) and the oil price tracker ETF, the United States Oil Fund (USO). These prices have been indexed to their levels on January 1, 2024, with the index level on the date at 100. All show a rise starting early March, indicating that Shell’s price rise is down to higher oil prices. Interestingly though, along with some correction in oil prices from mid-April onward, both USO and BP have seen a decline. But Shell continues to see an uptick. So far this month, it’s up by 2.4% compared to a 2.4% decline in BP and a 1.9% fall in USO’s price. This brings me to the second supporting factor for the stock. But before that, the fact that oil prices are now forecast to rise by 7.3% in 2024 could remain a supportive factor for the rest of the year as well.   Source: Seeking Alpha, Author's Estimates #2. Results don't disappoint  Shell’s results for Q1 2024 released earlier this month have also been instrumental in holding up its price. Unlike BP, which saw a 3.8% decline when its results were released, Shell hasn't seen the same reaction. In fact, it has gained some 4% since then. On a year-on-year (YoY) basis, there's still weakness in the figures, with a 17% revenue dip, which is also reflected in the earnings figures (see table below). However, the company showed sequential or quarter-on-quarter (QoQ) improvements on declining operating expenses and rising margins. Moreover, along with the release, the company said it was buying back shares worth another USD 3.5 billion for Q2 2024, after completing buybacks worth USD 2.8 billion in the first quarter. For context, the proposed sum amounts to 1.5% of the stock’s current market capitalisation. It also maintained its dividend levels from Q4 2023, which continue to be a ~20% YoY increase. With the price rise since then, however, the forward dividend yield is now down to 3.74% from 4.3%, the last I checked. It’s also lower than Shell’s own five-year average yield of 4.6%, though it is 0.23 percentage points higher than the median yield for the energy sector. Despite the only partly positive dividend scenario right now, there are still gains to be made from the stock, as is discussed next. Source: Shell #3. Still attractive market multiples Shell's market multiples still look good, even after a price rise. The non-GAAP price-to-earnings (P/E) have risen since I last checked, to be sure. While the trailing twelve months [TTM] ratio was at 7.7x, it’s at 8.8x now. The forward ratio was at 8.4x and has risen similarly to 9.02x. Here’s the rub, though. The energy sector’s median P/Es have also risen in the meantime, from a TTM ratio of 8.7x and a forward ratio of 10.2x to 10.8x and 11.1x respectively now. This, in turn, implies that there’s still an upside to the stock. In fact, of all the P/Es, only the GAAP TTM P/E is higher than that for the sector (see table below). But I’d de-emphasise it considering that the reported earnings in the full year 2023 were affected by impairments (see the head “Reported profit drops” in the first link in this article for more details). Moreover, as the table below shows, the non-GAAP P/Es are also trading significantly below the stock’s five-year averages, which further confirms that the stock can continue to rise. Source: Seeking Alpha The macro risks But where there are supportive factors, there are also risks. A long-forecast slowdown in the US, the biggest oil consuming country, finally appears to be here. The economy’s Q1 2024 figures reflected sub-trend growth. Coupled with a recent uptick in inflation, which indicates that interest rates will stay higher for longer, the picture doesn’t look good. The outlook for China, the second biggest oil consumer, isn’t particularly buoyant either. This risk is tempered by geo-political challenges in the Middle Eastern region, which could keep oil prices elevated. Not only is this the worst of reasons for sustained oil prices, it might not benefit Shell significantly anyway. As I pointed out in the BP article, if a Labour government is elected in the UK, the windfall tax on oil and gas companies is expected to rise to 78% from the current 75% level. It’s also worth pointing out, that analysts' estimates on Seeking Alpha pencil in a 3% earnings per share [EPS] drop in 2024 already. What next? Even accounting for the risks, however, the stock still looks well placed. Even if it weren't to go up to levels indicated by the past average P/Es, just based on the energy sector P/Es, there's at least 20% upside to it. The company's continued share buybacks add further impetus to the stock price. The dividends continue to be an additional factor adding to returns on Shell, even though the forward dividend yield has declined in the past quarter as the price has risen. The sequential improvement in the company's earnings in Q1 2024 gives further confidence in its fundamentals. The pickup in reported profits, in particular, is encouraging. Moreover, with just a single quarter of softer growth in the US so far and the outcome of the UK's elections later in the year unknown, the risks might or might not play out either. All in all, Shell remains a Buy.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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