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Shell shares look cheap. Should I buy them?

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

Shell (LSE: SHEL) shares have performed well over the last 12 months. Yet they still look pretty cheap today.

Are they worth buying for my portfolio? Let’s discuss.

A lot to like

There are a number of things to like about Shell from an investment perspective right now.

For starters, the company has momentum, thanks to high energy prices. For 2022, analysts expect the oil major to post a net profit of $39bn, up from $20.1bn in 2021.

Secondly, the group is returning a lot of cash to shareholders. For the third quarter of 2022, Shell declared a dividend payout of $0.25. However, it said that it plans to increase its Q4 2022 payout by 15%. That puts the trailing yield at about 3.5%, which is healthy.

On top of dividend payments, the group is returning cash to investors via share buybacks. In its Q3 results, it advised it was launching a new share buyback programme resulting in an additional $4bn of distributions. It expects to complete these buybacks by its Q4 2022 results announcement in February.

Third, it’s strengthening its balance sheet. In Q3, Shell reduced its net debt by around $2b to $48.3bn.

Finally, as I said at the top of the article, the shares are cheap. For 2022, analysts expect the group to post earnings per share of $5.27. At the current share price and exchange rate, that equates to a price-to-earnings (P/E) ratio of less than six.

That’s less than half the FTSE 100 average. It’s also far lower than the P/E ratios of the US oil majors. Chevron, for example, currently has a P/E of around 9.5. So Shell shares appear to be undervalued on a relative basis at present.

The risks

There are quite a few risks to consider here though. One is energy price volatility. Shell’s fortunes are tied to oil prices, and these are notoriously hard to predict.

The World Bank expects Brent crude oil to average $92 per barrel in 2023 and $80 per barrel in 2024 (versus $88 a barrel today). However, realistically, it has no idea how oil will perform going forward (and neither does anyone else). There are many variables that could impact prices including Russia/Ukraine, China’s demand, and the global economy.

Windfall taxes are another issue. In November, the UK government announced it would be increasing its windfall taxes on oil and gas producers’ profits from 25% to 35% in 2023. These taxes could eat into profits and threaten dividend growth.

Speaking of dividends, I don’t have as much faith in Shell’s payout as I used to. That’s because the company slashed its dividend a few years ago.

Finally, sustainability/ESG risks also shouldn’t be ignored. These could impact sentiment towards the stock.

We recognize Shell has made tremendous improvement in its climate targets. Nevertheless, it still lacks an absolute 2030 (emission reduction) target,” said Jean-Philippe Desmartin, Head of Responsible Investment at Edmond de Rothschild Asset Management, recently.

My move now

Weighing everything up, I’m going to leave Shell shares on my watchlist for now. They do appear to be undervalued. However, all things considered, I think there are better stocks to buy for my portfolio today.

The post Shell shares look cheap. Should I buy them? appeared first on The Motley Fool UK.

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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.