The Shell share price has soared since Russia’s invasion of Ukraine amid the resultant rise in oil and gas prices. It recently offloaded its Russian business Lukoil, a move that so far has not affected its stock. However, a windfall tax and general market volatility might yet have an impact.
On 12 May, energy giant Shell [SHEL.L] agreed to sell its Russian retail business to Lukoil [LKOD]. It’s a move that has seemingly not yet affected its share price, which has seen major recent growth as energy prices continue to soar. But could there be repercussions down the line?
The UK’s leading oil and gas firm pledged in early March that it would cut its investments in Russia following the country’s invasion of Ukraine. Other western oil companies have promised the same, but this is the sector’s first significant sale.
Lukoil is Russia’s second-biggest oil producer after state-backed Rosneft [ROSN], and the deal involves handing over 411 petrol stations run by Shell’s Russian arm, Shell Neft, as well as a lubricants-blending plant based north of Moscow. It’s believed the move will safeguard 350 jobs.
In all, Shell says pulling out of its Russian business will cost around $4–5bn.
How has Shell’s share price reacted to the sale?
Following the announcement on 12 May, Shell’s stock has risen 3.2% to 24 May, when it closed at 2,366p. Since 24 February the UK-headquartered company’s share price has gained 23.1%, and over the past 12 months it’s seen a 76.4% jump in value.
It’s likely other oil majors will follow in Shell’s footsteps. US giant Exxon Mobil [XOM] has pledged to completely leave Russia, with a rumoured target date of 24 June, as reported by Reuters in April. BP [BP.L], meanwhile, took a hit earlier this month after a similar decision to exit. A related $25.5bn pre-tax accounting charge led the company into a $20.4bn loss for its first quarter, despite what it termed “exceptional” oil and gas trading.
Oil companies are only the tip of the Russian exodus. French car-maker Renault [RNO] last week announced it will sell its 68% stake in Russian auto company AvtoVAZ to a Moscow research facility. It’s a move some believe might force it to positively reconfigure its business.
After the US and Saudi Arabia, Russia is the third-biggest global producer of oil, and it is the world’s largest exporter of gas.
Will Shell close its valuation gap?
Shell reported record results as energy firms continued to benefit from rising oil and gas prices. On 5 May, the company announced profits of $9.13bn for the first quarter of 2022, a giant leap of 185.3% on the $3.2bn for the same period in 2021. It announced earnings of $2.38 per share, beating analysts’ consensus of $2.12 by 12.3%.
The company produces approximately 3.7 million barrels of oil equivalent per day, with a market value of $207bn. Its assets include the world’s biggest liquefied natural gas (LNG) business; LNG is regarded as the ‘cleanest’ fossil fuel, with lower carbon emissions than oil. The near-term outlook for this sector currently appears especially strong as Europe aims to reduce its reliance on Russian gas. Shell also possesses the world’s largest service stations network, comprising 45,000 sites across 70 countries.
However, some analysts believe Shell is experiencing a ‘valuation gap’ — its US-listed shares are trading at around six times its predicted earnings of $9 per share. By contrast, rivals Exxon Mobil and Chevron [CVX] have been, respectively, trading at nine and 12 times their earnings. This means Shell is regarded as cheap compared with its US peers.
Third Point’s Dan Loeb is among those calling for the company to break up its assets to streamline its operations. “Shell’s portfolio of disparate businesses ranging from deepwater oil to wind farms to gas stations to chemical plants is confusing,” he wrote in a note seen by Barron’s.
Some analysts also criticised Shell’s low dividend payouts during the pandemic, which slid from $0.94 to $0.50 per quarter despite high earnings. Conversely, companies like Chevron and Exxon’s have held steady. Shell’s current 2022 dividend yield is 3.7%.
Analysts’ outlook mostly positive for Shell stock
Shell has had a record-breaking year. However, a potential windfall tax on oil companies could eat into its future profits.
Additionally, rising investment in renewables could impact the company’s costs in the short term as it seeks to expand its clean energy capabilities. Shell announced in March that it will direct much of its £20–25bn UK energy systems budget into green projects over the next decade. This might help it maintain investors shunning oil companies focused on fossil fuels — but equally, could also unsettle others preferring exposure to oil and gas.
Overall, the analyst outlook on the Shell stock appears to be mainly positive. On 6 May, analysts at Deutsche Bank raised their price on Shell shares from 2,038p to 2,551p.
Of eight analysts polled by MarketBeat, all but one have a ‘buy’ rating on the FTSE-listed SHEL.L stock. Their average 12-month outlook for the stock is 2,665.7p, a 12.7% increase from its closing price on 24 May.
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