Most FTSE 100 stocks don’t react well to rising oil prices. Recent history has shown us that higher energy costs cause soaring inflation, which acts as a brake on the global economy.
The 13 members of the Organization of the Petroleum Exporting Countries (OPEC), plus 10 other oil-rich states, are collectively known as OPEC+. These countries account for 40% of global oil production. They also own 80% of the world’s proven oil reserves.
The power of OPEC and OPEC+ is therefore considerable. And its unlikely to wane any time soon. According to the International Energy Agency, peak demand for oil is not expected until 2035.
OPEC+ uses its power to keep oil prices as high as possible without choking off demand.
This week, members of the cartel voluntarily agreed to reduce production by 1m barrels a day — equal to approximately 1% of global demand.
Not surprisingly, the price of oil jumped 6% on the news. It still remains well below its recent peak. The Brent crude benchmark is now trading at $82, compared to $130 in June last year.
But Shell (LSE:SHEL) was one FTSE 100 stock that reacted positively to this week’s surprise decision by OPEC+. The energy giant’s shares gained 4% after the announcement was made.
Yet to be convinced
However, even with OPEC+ clearly intent on maintaining an elevated oil price, I’m not that keen on buying shares in Shell. Here are my three reasons.
Firstly, gas prices are falling. And Shell sells a lot of liquid natural gas (LNG) and associated products.
Gas prices are likely to remain low for some time as, unlike oil, they are much more difficult to manipulate. Russia tried to restrict flows to Europe ahead of last winter. But through a combination of luck (milder weather) and sensible demand management, gas prices didn’t rise as Russia had hoped.
Prices in Europe are currently 80% lower than they were in August 2022. In the US, gas is trading in line with historical norms.
Those dreaded buybacks
Secondly, I don’t like the way Shell rewards its shareholders.
In cash terms, its dividend is currently 45% lower than it was in 2019.
Yet, despite generating more surplus cash than ever before, the company decided to spend 2.5 times more on buying its own shares ($19bn) than it did on dividends ($7.6bn).
| Year | Cash flow from operations ($bn) | Dividend per share ($) |
| 2018 | 53.1 | 1.88 |
| 2019 | 42.2 | 1.88 |
| 2020 | 34.1 | 0.65 |
| 2021 | 45.1 | 0.89 |
| 2022 | 68.4 | 1.04 |
The biggest beneficiaries of this policy are members of the management team whose bonuses are based on earnings per share. As a shareholder, I prefer cash in my hand.
Not cheap
Finally, the company’s share price is only 13% lower than it was in May 2018, when the dividend was $1.88 per share.
In my opinion, the current outlook for energy prices doesn’t justify the stock being as close to its five-year high.
Although the company’s price-to-earnings (P/E) ratio is reasonable — it’s currently just below eight — I’m conscious that it’s based on last year’s record-breaking earnings.
Looking after number one
In common with OPEC’s members, I’m going to act out of self-interest.
Like me, the oil cartel is seeking a “fair return on capital for those investing in the petroleum industry“. With a dividend yield below the FTSE 100 average, I wouldn’t get that with Shell. I’m therefore not going to invest at the moment.
