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A selective comparison of oil majors - and an investment case for Shell

A sector comparison makes it clear: The shares of the British $SHEL.L (Shell PLC) are far cheaper, for example, than the rivals $XOM (Exxon-Mobil) or $CVX (Chevron). Many investors have pounced on energy stocks this year, sending prices soaring. But there are still bargains in the sector.


Shell has some of the most attractive assets in the global energy business, particularly the world's largest liquefied natural gas business and the largest gas station network. Exxon Mobil's share price is equivalent to ten times estimated 2022 earnings, while Chevron trades at about nearly eleven times earnings. Shell could take steps to close the valuation gap by, for example, splitting up the company, as Third Point activist investor Dan Loeb has called for. So far, Shell's management has resisted. Loeb wrote in a recent letter that Shell's portfolio, with its disparate businesses ranging from deepwater oil to wind farms to gas stations to chemical plants, would be confusing and disorganized.


The liquefied natural gas (LNG) business and fueling stations together could be worth $170 billion. That makes them the largest part of Shell's $222 billion market value, although these businesses generate only 35% of cash flow.


The corporation could also pay a much higher dividend. The company cut its payout by 65% in 2020 due to the Corona pandemic. Its current dividend yield of 3.4 percent is comparable to Exxon (3.6 percent) and Chevron (3.2 percent). Shell maintains a conservative dividend payout ratio of 20 percent, based on projected 2022 earnings. By contrast, it is 35 percent for Exxon and Chevron.


Shell's operating cash flow is 30 to 40 percent higher than Chevron's However, its annual dividend payout of $7.5 billion is lower than Chevron's $11 billion. Shell has net debt of $48 billion, more than Exxon or Chevron. Shell can be expected to continue to reduce this debt rapidly. So Shell could easily pay a higher dividend.


𝐁𝐮𝐲𝐛𝐚𝐜𝐤𝐬 𝐚𝐫𝐞 𝐛𝐞𝐢𝐧𝐠 𝐞𝐱𝐩𝐚𝐧𝐝𝐞𝐝

The company has expanded its share buybacks. It plans to buy back $8.5 billion worth of securities in the first half of the year. For the full year, it expects to spend $15 billion. While buybacks are a good use of cash given Shell's low valuation, many investors would rather see a higher dividend.


One of the world's leading energy companies, Shell produces about three million barrels of oil equivalent per day, the same as Chevron. The group surpassed both Exxon and Chevron in the first quarter with net income of $9.1 billion. That excludes about $4 billion in costs related to Russian assets.


𝐒𝐡𝐞𝐥𝐥'𝐬 𝐦𝐨𝐬𝐭 𝐬𝐮𝐜𝐜𝐞𝐬𝐬𝐟𝐮𝐥 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐢𝐬 𝐢𝐭𝐬 𝐢𝐧𝐭𝐞𝐠𝐫𝐚𝐭𝐞𝐝 𝐠𝐚𝐬 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬

The company is the world's largest producer of liquefied natural gas, with a ten percent market share in terms of production volume. LNG has been a very good business since the war between Russia and Ukraine. The prospects for LNG are good as Europe seeks to become less dependent on Russian gas. And Asian LNG demand, especially from China, is likely to increase sharply in the coming decades.


𝐖𝐡𝐲 𝐢𝐬 𝐒𝐡𝐞𝐥𝐥 𝐜𝐡𝐞𝐚𝐩𝐞𝐫 𝐭𝐡𝐚𝐧 𝐭𝐡𝐞 𝐨𝐭𝐡𝐞𝐫𝐬?

Shell's stock is cheaper compared to Chevron and Exxon because the company is based in Europe and is under more pressure from climate change activists to scale back its oil and gas business. As a result, the group is making more of an effort to go green than its U.S. competitors. Frequent statements about its involvement in the "energy transition" have unsettled some investors who want to participate in the oil and gas business and believe that fossil fuels will continue to play a crucial role in meeting the world's energy needs for decades to come.


𝐖𝐡𝐚𝐭 𝐝𝐨 𝐲𝐨𝐮 𝐭𝐡𝐢𝐧𝐤 𝐨𝐟 𝐭𝐡𝐞𝐬𝐞 𝐭𝐡𝐫𝐞𝐞? 𝐈 𝐥𝐨𝐨𝐤 𝐟𝐨𝐫𝐰𝐚𝐫𝐝 𝐭𝐨 𝐲𝐨𝐮𝐫 𝐜𝐨𝐦𝐦𝐞𝐧𝐭𝐬!


Disclaimer: I own $SHEL.L stock. The above is my analysis and opinion, not investment advice.


$OIL$XOP

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