Shell’s (LSE: SHEL) share price is trending upwards right now. Since crashing below 1,000p in 2020, it has powered above 2,400p.
Are shares in the global energy giant worth buying today? Let’s discuss.
Strong cash flow
There are certainly reasons to be bullish here right now. For a start, the company is generating a healthy cash flow.
For Q4 2022, cash flow from operations came in at a massive $22.4bn. That compares to $8.2bn in Q4 2021. Free cash flow for the quarter was $15.5bn versus $10.7bn a year earlier.
This level of flow gives Shell a lot of options going forward.
Returning cash to shareholders
Second, Shell is also returning a lot of this cash to shareholders. For 2022, the oil major declared a dividend payout of $1.0375 per share, up 15% year on year. That equates to a yield of around 3.4% at today’s share price.
On top of the dividend, the company has been buying back its own shares. In both its Q3 and Q4 2022 results, Shell announced buybacks of $4bn. These should help boost earnings per share.
Stronger financial position
Third, the company has used its cash flows to strengthen its balance sheet. At the end of 2022, net debt was $44.8bn, down from $52.6bn a year earlier. That represents a 15% dip, which is a decent reduction.
Having said that, BP was able to reduce its net debt by around 30% last year.
Low valuation
Finally, the shares still look undervalued. Currently, analysts expect Shell to generate earnings per share of $4.60 for 2023. That currently puts the stock on a price-to-earnings (P/E) ratio of just 6.6. I see room for multiple expansion at that level.
It’s worth noting here that US rivals Chevron and Exxon have much higher P/E ratios. The former currently trades at 11.6 times this year’s forecast earnings while the latter trades at 11.1 times this year’s expected earnings.
Oil price risk
Of course, one big risk is oil price volatility. Fluctuations here can have a big impact on Shell’s cash flows, profits and share price.
This was illustrated last month. As the price of Brent crude dipped, Shell’s share price fell from around 2,600p to around 2,200p in the blink of an eye.
Looking ahead, it’s hard to know where oil prices will go next. China’s reopening could provide some support for oil. On the other hand, a recession in the US could lead to lower demand for the commodity.
Another risk is the global shift to renewable energy. Is Shell doing enough on this front to position itself well for the future? I’m not sure.
Last year, the group funnelled around $3.5bn into Renewables and Energy Solutions business – about 14% of its total capital expenditures. It could be doing more here, in my view.
My view
Weighing everything up, I can see some appeal in Shell shares at present. I think they have the potential to climb higher.
However, they wouldn’t be the first shares I’d buy today. Right now, I think there are better investment opportunities out there.
