Crude futures (CLU24) climbed above the $80 level today on rising Middle Eastern tensions, but oil's performance might not be a one-day wonder. The Energy Information Administration (EIA) recently hiked its 2024 forecast for U.S. oil demand by 100,000 barrels per day, while simultaneously trimming its production forecast by 20,000 bpd. The agency also dropped its price forecast, but with volatility running high in the stock market, it doesn't take much for crude prices to pop higher. Analysts like Maurice FitzMaurice from Fidelity Investments highlight a bright outlook, emphasize that tight supply and geopolitical tensions are keeping oil prices elevated.
Shell (SHEL), a significant player in the energy sector, is strategically poised to benefit from these trends. The company is known for its strong operational performance and has made significant strides in bolstering its liquefied natural gas (LNG) portfolio, while achieving substantial cost savings. With its stock trading at a relatively low valuation compared to its peers, and a high dividend yield to boot, Shell presents an attractive investment for those eager to capitalize on the energy industry's promising future. By focusing on strategic growth areas and maintaining robust financial health, Shell is well-positioned to thrive as the energy sector evolves.
Shell's Market Performance
Valued at $227.2 billion, Shell Plc (SHEL) has been making strides in the energy sector, with a 52-week gain of 16%. The stock's upward momentum has continued into 2024, with SHEL notching a year-to-date increase of about 10%.
When you look at the numbers, Shell's valuation metrics make it even more appealing. The company is trading at 8.27 times forward adjusted earnings, and 0.75 times sales - representing a substantial discount to many of its peers in the energy sector. This relative undervaluation presents a golden opportunity for investors who want to tap into Shell's growth potential without paying a hefty premium.
On top of that, Shell offers a dividend yield of about 3.79%, which is great news for income-focused investors. Since a pandemic-era pause, Shell has been on a steady path of increasing its dividend, with a notable 18.6% hike in 2023, bringing the annual rate to $2.73. This makes Shell a reliable choice for those looking for a steady income stream from dividends.
Shell's financial performance in the second quarter of 2024 further solidifies its position as a leader in the energy sector. The company reported adjusted earnings of $6.3 billion, beating analyst expectations of $5.9 billion, despite facing challenges like lower fossil fuel prices and refining margins.
With cash flow from operations hitting $13.5 billion — the highest in a year — Shell has shown its operational efficiency and financial resilience, making it a standout performer in the industry.
Key Operations Driving Growth
Shell is strategically advancing in the energy sector, setting the stage for some exciting growth. Recently, they kicked off a $3.5 billion share buyback program, which further highlights their solid financial footing and commitment to giving back to shareholders.
Beyond buybacks, Shell is expanding its footprint in the LNG market, anticipating a 50% increase in global LNG demand 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 after exiting Russia in 2022, Shell has been actively securing new agreements. These efforts are part of a broader strategy to increase LNG volumes by up to 20 million tons annually by 2030.
Under CEO Wael Sawan, Shell has invested in projects like the Ruwais LNG venture in Abu Dhabi, aiming to double the plant's output by 2028. Plus, their acquisition of Pavilion Energy expands their reach into European and Singaporean markets, securing 6.5 million tons per year of contracts globally.
Shell's Growth Trajectory
As we head into the latter half of 2024, analysts are anticipating modest bottom-line growth for SHEL. For the third quarter ending in September, they're forecasting an earnings per share (EPS) of $1.86, with a slight bump to $1.90 expected in the fourth quarter.
Even though revenue growth is anticipated to remain flat to slightly lower over the next three years, this aligns with broader trends in the UK oil and gas sector, suggesting that Shell is holding steady in the face of industry challenges.
On the analyst front, the outlook is optimistic. The mean target price is set at $84.97, which suggests a potential upside of about 17.3% from Monday's close. With input from 15 analysts, the consensus is a "moderate buy," based on 10 “strong buy” ratings, one “moderate buy,” and four “hold” ratings.
Conclusion
In conclusion, Shell (SHEL) stands out as a compelling investment in the energy sector, offering a blend of growth potential, attractive valuation, and reliable dividends. Strategic initiatives like their share buybacks and LNG expansion, coupled with positive analyst sentiment and a promising earnings outlook, leave Shell well-positioned to navigate the evolving energy landscape. For investors seeking a stable yet dynamic addition to their portfolio, Shell presents an opportunity that’s hard to ignore.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
