Shell: Strong Cash Flow, Share Buybacks, Bullish Price Momentum Into Q4

The prompt month of WTI just registered its best quarterly advance since Q1 2022. The 27% climb came as the US dollar rose sharply and interest rates around the world jumped. Multinational companies have their work cut out for them amid a shaky macro backdrop. Energy sector stocks, not surprisingly, led the way last quarter, with the Energy Select Sector SPDR ETF (XLE) easily earning the top spot.

I have a buy rating on shares of Shell plc (NYSE:SHEL). Its low valuation, strong dividend, and robust momentum situation are compelling from the long side.

Oil's Best Quarter Since Early 2022

Energy Powers Higher in Q3

According to Bank of America Global Research, Shell is engaged in the business of producing, refining, storing, transporting, supplying, and distributing petroleum and petroleum products. The operating companies of the group are engaged in various activities related to oil and natural gas, chemicals, power generation, renewable resources, and other businesses in over 135 countries.

The London-based $212 billion market cap Integrated Oil and Gas industry company within the Energy sector trades at a low 7.8 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.6% dividend yield. Ahead of earnings due out in early November, shares trade with a low implied volatility percentage of 20% and there is no listed short interest on the stock.

Back in July, shares dipped following a mixed Q2 earnings report. Operating profits per share verified at $0.74 while revenue came in at $74.6 billion, a 25% year-on-year decline. Its quarterly adjusted earnings of $5.1 billion were hurt by lower oil and gas prices and weaker refining margins. What assuaged investors' concerns, though, was the announcement of a $3 billion share repurchase program, expected to be completed over the coming weeks.

The buyback plan has come alongside a steady rise in SHEL since late July. The firm lowered its capex outlook and hiked its quarterly dividend by 15%. Strength in its LNG activities and discipline among its executive team help make the firm among the most cash flow-generative companies in its sector.

Key risks include how the ESG narrative and policy action unfold in Europe as well as any other adverse political or regulatory changes. Macro shifts in energy demand could also hurt the currently strong environment, including ebbs in the LNG market and with refining margins. Unfavorable currency moves and poor capex execution could also weigh on earnings.

On valuation, analysts at BofA see earnings near $9 on an adjusted basis for the ADR shares this year to $9.21 next year. The consensus estimate for next year’s EPS is about $8.50 with decent growth into 2025. Dividends, meanwhile, are expected to rise at a steady clip over the coming quarters despite Shell being an international company and operating in the volatile energy space.

With a forward operating earnings multiple under 8 on both a trailing and forward basis and considering that Shell generates massive free cash flow ($5.96 on a trailing 12-month basis), there is a lot to like from a profitability perspective.

Shell: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume $8.50 of normalized EPS and assign an 11 multiple (between the sector median and Shell’s 5-year historical average), then the stock should be near $93. With bottom-of-the-barrel sales and EBITDA ratio, listed below, that valuation may be conservative if global oil prices hang in the $90 to $100 range for an extended period.

Shell: Very Attractive Valuation Metrics

Compared to its peers, Shell features a solid valuation, though its large ex-US presence hurts its EPS growth rating compared to some smaller domestic firms. The entire European integrated oil space is on the cheap side for the most part, and price action has been lackluster from a momentum perspective.

I assert, however, that Shell’s chart is particularly compelling (which I will detail later). EPS revisions have been soft, but if Shell delivers on earnings next month and if oil prices hold at current levels, then I would expect possible upside news headlines via better EPS revisions.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q3 2023 earnings date of Thursday, November 2 BMO. Before that, Shell’s management team is expected to speak at the Berenberg Madrid Seminar 2023 on Thursday this week. Volatility could also strike when the firm issues monthly oil production figures on Monday, October 9.

Corporate Event Risk Calendar

The Technical Take

With a modest valuation and a bullish sector backdrop, momentum trends are positive with the ADR. Notice in the chart below that shares have been in a strong uptrend in the last three years. After successfully retesting its March 2020 low in October of that year, SHEL has appreciated nearly three-fold. Recently, the stock broke above a key resistance range in the low $60s.

Rallies in mid-2022 and early this year failed at that area, which was also the early 2020 pre-pandemic peak as well as where a gap-down occurred in Q3 2019. So long as this zone holds, then a bullish technical setup remains in play. What I like here is that the stock’s RSI momentum gauge is firmly in bullish territory with no signs of negative divergence. Also, SHEL rose above an area of significant volume by price, so any pullback should be met with natural buyers. Ultimately, I see shares rallying further to the 2018 peak near $75. Bigger picture, the breakout may even assert that an upside-measured move price objective to about $103 would be in play ($62 - $21 = $41, $41 + $62 = $103).

Overall, the chart is constructive and the rising long-term 200-day moving average suggests that the bulls are in control.

SHEL: Upside Breakout, Eyeing $74 in the Near Term

The Bottom Line

I have a buy rating on Shell. The large oil company is attractively priced and technical trends are robust.