Crude oil futures (CLU24) rose above the $80 mark today on rising tensions in the Middle East, but oil’s performance may not be a one-day miracle. The Energy Information Administration (EIA) recently raised its forecast for U.S. oil demand for 2024 by 100,000 barrels per day while lowering its production forecast by 20,000 bpd. The agency also lowered its price forecast, but with high volatility on the stock market, it doesn’t take much for crude oil prices to rise. Analysts like Maurice FitzMaurice of Fidelity Investments stress that the outlook is positive, emphasizing that tight supply and geopolitical tensions are keeping oil prices high.
Shell (SHEL), a major player in the energy sector, is strategically well positioned to benefit from these trends. The company is known for its strong operational performance and has made great strides in strengthening its liquefied natural gas (LNG) portfolio while achieving significant cost savings. With the stock trading at a relatively low price compared to its peers and a high dividend yield, Shell represents an attractive investment for those looking to capitalize on the promising future of the energy industry. By focusing on strategic growth areas and maintaining solid financial health, Shell is well positioned to thrive as the energy sector evolves.
Shell’s market development
Shell Plc (SHEL), valued at $227.2 billion, has made great strides in the energy sector, gaining 16% over the past 52 weeks. The stock’s upward momentum has continued into 2024, with SHEL gaining about 10% year-to-date.
Looking at the numbers, Shell’s valuation makes it even more attractive. The company trades at 8.27 times underlying earnings and 0.75 times sales – a significant discount to many of its peers in the energy sector. This relative undervaluation represents a golden opportunity for investors looking to capitalize on Shell’s growth potential without paying a large premium.
Additionally, Shell offers a dividend yield of about 3.79%, which is good news for income-seeking investors. Since a pandemic-related pause, Shell has been on a steady path of dividend increases, with a notable 18.6% increase in 2023 that will bring the annual rate to $2.73. This makes Shell a reliable choice for those looking for a steady income stream from dividends.
Shell’s second-quarter 2024 financial performance further cements its position as a leader in the energy sector. The company reported adjusted earnings of $6.3 billion, beating analysts’ expectations of $5.9 billion, despite facing challenges such as lower fossil fuel prices and refining margins.
With cash flow from operations of US$13.5 billion – the highest in a year – Shell has demonstrated its operational efficiency and financial resilience, making it an outstanding performer in the industry.
Important business areas as growth drivers
Shell is strategically expanding into the energy sector, setting the stage for exciting growth. The company recently launched a $3.5 billion share buyback program, underscoring its solid financial base and commitment to shareholders.
Beyond buybacks, Shell is expanding its presence in the LNG market and expects global LNG demand to increase by 50% by 2040. This growth is largely driven by the transition from coal to gas in regions such as China and South Asia. To compensate for the LNG capacity lost following the Russian exit in 2022, Shell is actively seeking new contracts. These efforts are part of a broader strategy to increase LNG volumes by up to 20 million tonnes per year by 2030.
Under CEO Wael Sawan, Shell invested in projects such as the Ruwais LNG project in Abu Dhabi and aimed to double the plant’s production by 2028. In addition, Shell expanded its reach into the European and Singapore markets with the acquisition of Pavilion Energy, securing contracts for 6.5 million tonnes per year worldwide.
Shell’s growth curve
Analysts expect modest earnings growth for SHEL in the second half of 2024. For the third quarter ending in September, they forecast earnings per share (EPS) of $1.86, with a slight increase to $1.90 expected in the fourth quarter.
Although revenue growth is expected to be flat or slightly declining over the next three years, this is in line with broader trends in the UK oil and gas industry and suggests that Shell is rising to the challenges facing the industry.
Analysts are optimistic. The median price target is $84.97, suggesting an upside of about 17.3% from Monday’s closing price. According to 15 analysts, the consensus is a “moderate buy” based on 10 “strong buy” ratings, one “moderate buy” rating, and four “hold” ratings.
Diploma
In summary, Shell (SHEL) represents an attractive investment in the energy sector, offering a mix of growth potential, attractive valuation and reliable dividends. Strategic initiatives such as share buybacks and the expansion of the LNG business, coupled with positive analyst sentiment and a promising earnings outlook, put Shell in a good position to navigate the evolving energy landscape. For investors looking for a stable yet dynamic addition to their portfolio, Shell represents an opportunity that is hard to pass up.
On the date of publication, Ebube Jones had no position (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s disclosure policy here.
