Oil and gas giant Shell (NYSE:SHEL) has held up better than its bigger rivals over the past year. Its shares rose 8% compared to a 10% decline by Exxon Mobil (NYSE:XOM) and a 17% drop by Chevron (NYSE:CVX). This is undoubtedly good news for investors who hold SHEL stock.
Yet the British integrated energy stock recently announced it was taking a $2.5 billion to $4.5 billion charge in the fourth quarter. It’s looking to sell its Jurong Chemicals refining and chemicals hub in Singapore by the end of 2024 and is taking non-cash charges related to it. The whole refining and chemicals segment is underperforming especially the latter component. Shell expects the segment to post an adjusted loss for the period.
Although the major is forecasting better gas earnings, oil will be lower and the chemicals business is dragging down its financials. After a steady run higher for the past two years, should SHEL stock investors continue holding or take profits and wait for better opportunities to re-enter?
Black gold can still make money
Certainly, Shell faces challenges, and not just from Exxon or Chevron, which have outperformed the British energy stock of the past three-, five-, and 10-year periods. Global economic and geopolitical turmoil makes the sector volatile while tension over environmental regulation creates uncertainty. After Shell’s latest update, Wall Street maintains its hold rating on the stock.
Yet Shell has plenty of long-term tailwinds behind it. Demand for fossil fuels remains expansive and pricing remains elevated. The U.S. Energy Information Administration forecasts oil prices around $80 per barrel over the next few years. As Shell’s stock buyback break-even point is $50 per barrel and the dividend is around $40 per barrel, the energy company can withstand a lot of downward pricing pressure.
Speaking of its buybacks and dividends, Shell plans to repurchase $3.5 billion worth of shares before the end of the fourth quarter and hike its payout by 15% for 2024. During the pandemic, Shell slashed the dividend from $0.47 per share to $0.16 per share to conserve cash. However, neither Exxon nor Chevron cut their payouts. It was the first time in 75 years the dividend was cut.
Since the cut, though, Shell has steadily increased the payout. With the latest increase, the quarterly American Depositary Shares dividend is $0.66 per share and yields 4% annually. With a very low payout ratio on both an earnings and free cash flow basis, the dividend should be safe from future cuts. It also has plenty of room for additional growth. Shell says it targets 4% annual growth in the payout.
A sickly green tint
Shell has previously focused on low-carbon energy sources and owns a substantial renewables business. Yet part of SHEL stock’s performance problems has been its focus on its goal of net zero emissions by 2050. By getting caught up in building green credibility at a time of soaring fossil fuel prices and demand, it suffered poor returns.
CEO Wael Sawan who took over in January 2023 is looking to change that. He’s not abandoning Shell’s renewables and low-carbon business but rather is infusing further growth in oil and gas. He plans to hold oil output steady while increasing gas and liquid natural gas (LNG) production.
The renewables business is expected to make anywhere from a $300 million loss to a $300 million profit in Q4. While that’s a gap wide enough to drive an oil rig through, it underscores the issues the segment has. Last year the business generated a $293 million profit.
Should I stay or should I go?
Shares of Shell fell 5% after it updated its fourth-quarter outlook. It will release results on Feb. 1 and I wouldn’t be a seller here. First, investors should react to short-term events but ought to have a long-term mindset when investing. But Shell is still a financially strong company with significant tailwinds driving it forward. A hiccup like the writedowns and the renewables drag are not enough to impact its overall direction.
At 7 times trailing earnings and estimates and just 5x its free cash flow, SHEL stock is cheap. Rather than a sell or even a hold, I see Shell as a buy. It’s a quality company offering substantial growth in the years ahead.
On the date of publication, Rich Duprey held a LONG position in CVX and XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
