Like many oil companies, the Royal Dutch Shell (LSE:RDSB) share price took a major hit in 2020. The global impact of Covid-19 brought oil prices to their lowest point in decades that ultimately forced the company to cut its dividend for the first time in over 75 years.
But since late October, the RDSB share price has been rising, increasing by around 50%. What’s causing this growth? And should I be adding the stock to my portfolio?
The rising RDSB share price
While the effects of the pandemic are still very prominent, the continued rollout of vaccines worldwide has led to the slow easing of travel restrictions. Consequently, with more cars back on the roads and planes in the sky, demand for oil has made a comeback. It’s currently at around 95% of pre-pandemic levels, according to the International Energy Agency.
As such, oil prices have recovered to around $60/barrel, with some forecasts indicating a further 21% increase this year. Because oil production has a relatively fixed expense, rising oil prices increase the company’s profit margin. And based on the most recent update, this increase has been substantial. As it stands, the profit per barrel in Q1 2021 is expected to be around $2.65. That’s a 215% increase compared to $0.84 achieved in Q3 2020.
Meanwhile, as lockdown restrictions are eased, the operational capacity of its facilities has been increasing. Refineries are expected to reach between 71% and 75% production capacity this quarter. And its chemical manufacturing plants should be around 77% to 81% as well. Overall it looks like the impact from Covid-19 is finally starting to wear off, and so I’m not surprised that RDSB’s share price has started climbing.
Some uncertainty lies ahead
The UK government has passed legislation to prohibit the sale of new diesel and petrol vehicles as of 2030. Given we’ve just seen a preview of a world without fuel-guzzling vehicles on the road, demand for — and subsequently the price of — oil could quickly become diminished in the future, especially if other governments follow suit.
Needless to say, this adds quite a bit of pressure on the business to accelerate its transition into renewable energy. Given its size, nine years is not a long time. And there are likely to be plenty of expenses and challenges to contend with that could negatively impact its share price.
The bottom line
There remain several unknowns about the firm’s long-term strategy. However, based on the business’s current performance, city analysts have forecast earnings per share (EPS) for 2021 of around 128p. While this is less than pre-pandemic levels, comparing the EPS to the current stock price returns a price-to-earnings (P/E) ratio of approximately 10.5.
Given that the industry average P/E ratio is around 16, the RDSB share price looks like it’s currently undervalued. At least, that’s what I see. Therefore I believe it can continue to climb higher in 2021. And so, I would consider adding it to my income portfolio as a value investment.
