Should I buy Shell shares as oil prices surge?

With oil trading above $90 per barrel, Shell shares are on the rise. Are they a good investment today? Edward Sheldon takes a look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Two white male workmen working on site at an oil rig

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shell (LSE: SHEL) shares have had a great run recently. But they still look very cheap from a valuation perspective.

Are they worth buying today? Let’s discuss.

Three reasons to be bullish

There are certainly reasons to be bullish on Shell right now, to my mind. For starters, the company is going to be a major beneficiary of higher oil prices.

In September, the price of Brent crude oil rose as high as $95 per barrel on the back of supply concerns (Saudi Arabia and Russia announced they will be extending production cuts until the end of the year).

At that oil price, Shell is going to be minting money. That’s because the company’s breakeven price is somewhere around the $30-$40 a barrel mark.

It’s worth noting that many energy analysts expect oil prices to keep rising. Recently, analysts at Goldman Sachs raised their Brent oil price target to $100 from $93. Meanwhile, analysts at JP Morgan believe that Brent could hit $150 per barrel by 2026. They believe oil is in a ‘supercycle’ driven by low capital expenditure and supply shocks.

Another thing Shell has going for it is that dividends are rising rapidly. For 2023, analysts expect the oil major to pay out $1.38 a share in dividends to investors. That would represent a year-on-year increase of 33%. The company is also buying back shares right now. This could help increase earnings per share.

Finally, as I mentioned, the company’s valuation is low. At present, Shell shares sport a forward-looking price-to-earnings (P/E) ratio of around 7.6. To put that figure in context, the median P/E ratio across the FTSE 100 index is about 13. So the shares are trading at a significant discount to the broader market.

Risks to consider

There are a few risks to consider here though. One is the unpredictable nature of oil prices. Sure, prices are high now, but there’s no guarantee they will stay high (the global shift towards renewable energy adds some uncertainty here). So it’s hard to forecast Shell’s future revenues and earnings.

There are also some question marks over the group’s long-term strategy. In 2021, Shell said it would gradually cut oil production over the next decade and focus more on renewables.

However, in June, CEO Wael Sawan – who took the top job in January – outlined plans to slow investment in renewables and low-carbon business in an effort to boost returns. This has resulted in a bit of a backlash, with several employees recently writing to the CEO in an open letter urging him to stay focused on clean energy.

It’s worth noting that this is not the first time Shell has attracted attention for its lack of focus on clean energy.

My view

Weighing everything up, I do think Shell shares look quite interesting right now. However, there are a few other UK shares I’d buy before investing in the oil giant.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

2 passive income shares to consider for December 2024 onwards?

These are popular UK shares investors often buy for passive income from dividends, but are they actually good investments now?

Read more »

Young Black woman using a debit card at an ATM to withdraw money
Investing Articles

“If I’d put £5,000 into Santander shares just 2 years ago, here’s what I’d have now”

Our writer considers whether he thinks Santander shares still look good value after a strong period for the global Spanish…

Read more »

Investing Articles

My 3 favourite FTSE dividend stocks give me a mind-blowing 9.82% yield!

Harvey Jones is surprised to learn that he owns the three highest-yielding dividend stocks on the FTSE 100. So is…

Read more »

Investing Articles

Following strong 2024 results, this 6.1%-yielding FTSE 100 gem looks a bargain to me

With good 2024 results delivered, and a buyback and dividend increase announced, this high-yielding FTSE 100 heavyweight looks very cheap…

Read more »

Investing Articles

A ridiculously cheap FTSE 250 stock to buy today?

The FTSE 250's rising by double-digits, but this stock's seemingly falling behind despite higher cash flows and dividends. At a…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »