A major valuation gap in Shell’s (LSE: SHEL) share price has long been highlighted by CEO Wael Sawan. He’s particularly cited the higher valuations of its US peers.
On 8 April, Sawan said in Bloomberg Opinion that Shell is looking at “all options” to redress this valuation difference.
This includes switching its listing from London to New York if the gap remains after 2025. But is the difference down to its UK listing or its strategy?
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Is there a valuation gap?
Starting with the key price-to-earnings (P/E) stock value measurement, Shell currently trades at 11.8. This certainly looks undervalued against its peer group average of 14.4.
As Sawan highlighted, the big US oil firms – ExxonMobil, Chevron, and ConocoPhillips – are still ahead. They are trading, respectively, at P/Es of 13.3, 14, and 14.2. Saudi Arabian Oil is further ahead at 16.2.
BP is not in Shell’s immediate peer group due to its smaller operational scope and size, and trades at 7.
A subsequent discounted cash flow analysis shows Shell to be around 32% undervalued at its present price of £28.25.
So a fair value would be around £41.54, although this doesn’t necessarily mean it will reach that price, of course.
An energy transition valuation discount?
The key difference between Shell and the US and Saudi oil firms is its energy transition strategy, in my view.
The US and Saudi firms have fully committed to pushing their fossil fuels exploration, development, and production activities. Shell has sought to balance these with phased reductions in carbon emissions towards net-zero by 2050.
In fact, the handling of the energy transition has become a major risk for Shell.
Its valuation gap with its fossil fuel-driven competitors appears to widen the greener it gets. This gap seems to be a discount due to its greener transition strategy.
On the other hand, a return to more fossil fuel production may well mean greater government pressure on it.
Another risk attached to a greater reliance on oil and gas output is if there is an extended fall in fossil fuel prices again.
A more pragmatic approach
What may make a difference is Shell’s recent adjustment to its energy transition strategy. It’s now targeting a 15%-20% net carbon cut by 2030 compared to 2016 levels. Previously, it intended to achieve a 20% cut by 2030.
It also scrapped the previous 45% net carbon reduction target for 2035. But it remains committed to a 100% net carbon cut by 2050.
It has also said it will keep its oil production at 1.4m bpd until 2030. Additionally, it will expand its huge liquefied natural gas business, with forecasts that demand will rise over 50% by 2040.
Its Q4 2023 results showed adjusted earnings of $28.25bn against consensus analysts’ expectations of $26.82bn. Expectations now are that earnings per share will grow by 9.5% a year to end-2026.
Whether this will be enough to close the valuation gap between Shell and its peers no one can say. What I can say, though, is that if I didn’t already own the stock I would buy it right now.
To me, it looks very undervalued to its peers and appears set for strong growth over time.
