Image source: Getty Images
Shell’s (LSE: SHEL) share price has dropped 9% from its 13 May 12-month traded high of £26.86.
For much of that period it has tracked the oil price lower. But since December it has gained ground while the oil price has continued to lose it.
I think the key reason for this has been potential new liquefied natural gas (LNG) deals in the offing.
Since Russian energy exports were sanctioned after its Ukraine invasion, LNG has become the world’s emergency energy source. Unlike oil and gas moved through pipelines, LNG can be sourced quickly and moved to anywhere in the world fast.
The firm’s LNG expansion programme
Shell already has the largest LNG portfolio in the world. It has major projects in 10 countries and access to about 38m tonnes of its own LNG capacity from 11 liquefaction plants.
Towards the end of 2024 it committed to expand this business, based on forecasts for a 50%+ increase in demand by 2040.
This month saw Egypt make $3bn of deals to buy 60 cargoes of LNG in 2025 with Shell and TotalEnergies. Analysts expect more such deals to come from the North African state.
On 12 February, Norway permitted Shell to begin production from the huge Ormen Lange gas field’s third phase. It has 77 billion cubic metres of recoverable gas reserves remaining, with expected daily output of 70 million cubic metres.
Plans to boost oil output too
I think oil prices will be subject to several bearish forces in the near term. Demand from the world’s major net oil importer China looks uncertain along with its economic recovery from Covid.
And US President Donald Trump is overseeing a drive to push the country’s oil production higher. However, he also promised to ease the approvals process for new oil projects for international oil companies, such as Shell.
This means the firm can make more money even at lower prices by drilling more.
To this effect, 9 January saw it begin oil production at its Gulf of Mexico ‘Whale’ facility. This has estimated recoverable reserves of 480m barrels of oil equivalent (boe). Forecast peak production is 100,000 boe per day (boe/d).
And CEO Sawan met with Iraq’s prime minister in the same month to highlight Shell’s readiness to increase its investments in the country. Along with Saudi Arabia and Iran, Iraq has the cheapest oil in the world to produce at just $1-$2 per barrel.
Where could the share price go from here?
A risk here is gas and oil prices holding in sustained bearish trends over the long term.
That said, analysts forecast that Shell’s earnings will increase 7.4% a year to the end of 2027. And it is this growth that ultimately powers a firm’s share price (and dividend) higher.
In Shell’s case, a discounted cash flow analysis using other analysts’ figures and my own shows the stock is 37% undervalued.
Based on its current price of £26.86, this means the fair value of the shares is £42.63. Although market vagaries could push them lower or higher, the stock looks a bargain to me.
Given this and the strong earnings growth forecast, I will add to my Shell holding very soon.
