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Shell’s (LSE: SHEL) share price has dropped 17% from its 13 May 12-month traded high of £29.56.
Such a fall could flag that a company is fundamentally worth less than it was before. Or it may signal a bargain-buying opportunity to be had.
To find out which it is here, I ran the key numbers and looked more closely at the business.
How does the business look?
Its Q1 results on 2 May, which showed adjusted earnings of $5.6bn (£4.22bn). This was 27% lower than Q1 2024’s $7.7bn, largely reflecting the drop in the benchmark oil price over the period. However, it did beat consensus analysts’ forecasts for $4.96bn.
Positive as well was the announcement of another share buyback, which tends to support long-term stock price rises. This will be for $3.5bn of shares over the next three months. It marks the 14th consecutive quarter of share buybacks for the firm, each worth at least $3bn.
The firm also highlighted the completion of its Pavilion Energy acquisition. This will add significant new liquefied natural gas (LNG) business to Shell, as well as extra regasification capacity and shipping assets.
Shell is already a leader in the LNG field, which it forecasts will see a 60% increase in demand by 2040. But it plans to increase its sales of the gas by 4%-5% — and production by 1% — a year in the next five years.
A risk here is that this growth does not occur as predicted. Another is that oil and natural gas prices remain bearish for an extended period.
However, analysts forecast that Shell’s earnings will grow 10.3% a year to the end of 2027. Ultimately, increases here power a firm’s share price (and dividends) over time.
How does the share price look?
Shell looks very undervalued at its 0.7 price-to-sales ratio compared to its competitors’ average of 2.2. The firms are Chevron at 1.2, ExxonMobil at 1.3, ConocoPhillips at 2, and Saudi Aramco at 3.3.
It also looks undervalued on its price-to-book ratio of 1.1 against its peer group average of 2.3.
To pinpoint what these mean for its share price, I ran a discounted cash flow (DCF) analysis. This shows Shell is 63% undervalued at its present price of £24.90.
Therefore, the fair value for the shares is £66.43, although market forces could move them lower or higher.
Will I buy the shares?
I already have shares in Shell, based on its strong earnings growth potential. I also think that many investors do not appreciate a couple of key facts about the energy transition.
The first is that Shell will play a key part in that move from fossil fuels to cleaner energy.
The second is that this transition is likely to take a lot longer than commonly thought. President Donald Trump has started the process to withdraw the US from the Paris Agreement on climate change. Meanwhile, China aims to achieve net zero only by 2060 and India by 2070.
Given that these factors are still in play, I will buy more Shell shares very soon.
