Shell has delivered a 157.6% share price return over the past five years, which puts fresh focus on whether the current £36.48 level is properly supported by the cash the group can generate. With refining margins, liquefied natural gas investments and regulatory headlines all in play, the question now is how those moving parts feed into Shell’s long term cash flow profile.
-
That 157.6% gain over five years puts real weight on the issue of whether Shell’s present market value lines up with the cash flows investors expect it to produce over time.
-
Record refining margins and the planned LNG Canada expansion can influence future cash inflows, capital spending needs and the timing of returns to shareholders, all of which feed directly into any cash flow based valuation of Shell.
-
Prefer to judge Shell on earnings? See what Shell’s 10.6x P/E says about the price.
The issue now is whether the price implied by Shell’s recent share performance and news flow is adequately backed by its cash flows when assessed using a Discounted Cash Flow (DCF) view of intrinsic value.
If you want a quick comparison on how Shell’s cash flow story stacks up against other value opportunities, take a look at 8 high quality undervalued stocks.
Does Shell Look Undervalued on Cash Flow?
The Discounted Cash Flow model here takes Shell’s future free cash generation and works back to what that stream could be worth today. On this view, Shell’s latest twelve month free cash flow sits at about US$29.2b, with analyst projections pointing to a gently declining path over the next decade rather than aggressive expansion. That profile fits a mature energy giant, where big projects like LNG Canada and ongoing refining activity keep cash generation substantial but not on a steep upward ramp.
Those cash flow estimates still lead to an intrinsic value that the Discounted Cash Flow projections put substantially above the current £36.48 share price. Record refining margins of $42 per barrel and the approved US$33b LNG Canada expansion help explain why the model assumes Shell can keep producing sizeable free cash flows, even as longer term forecasts soften a little. Because those cash streams remain robust in the model, the current market price implies a meaningful discount to what the cash flow profile supports on this measure. Find out what Shell could be worth using our Discounted Cash Flow (DCF) estimate.
The Shell Narrative: What Would Justify Today’s Price?
Simply Wall St Narratives pick up where the DCF puzzle for Shell leaves off. They spell out which combinations of growth, margins and earnings would need to play out for the stock to be worth materially more or less than today’s price on the Community page. Instead of leaving you with a single valuation output, they set out the future that number relies on so you can watch how Shell’s actual progress lines up with those assumptions over time.
Shell attracts two very different readings, with one camp seeing more upside in the current plan than the other.
Bull case: 7% undervalued
“Shell’s significant and growing investment in LNG, highlighted by the start-up and ramp-up of LNG Canada and new projects in Egypt and Trinidad & Tobago, positions the company to benefit from steadily rising global energy demand and LNG’s role as a transition fuel…”
Discover why this Narrative puts Shell at 7% undervalued.
Bear case: roughly fairly valued
“The company’s continued reliance on oil and gas, with limited near-term detail on successful large-scale low-carbon or renewable energy transitions, exposes Shell to accelerating global decarbonization policies and shifts in energy demand…”
Explore why this Narrative puts Shell at roughly fairly valued.
Before you move on Shell, there is another side to weigh
DCF outputs and LNG storylines only cover part of Shell’s picture, because the latest research also flags specific risk checks that could change how you view this stock. Take a closer look at 3 warning signs (1 major) before settling on a valuation.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include SHEL.L.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
Source: finance.yahoo.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.
