Equity Research Report: Shell plc

Prepared by:
Gary Yeh
Natania Low
Cheong Ze Chang
Wan Joon Hau

April 23, 2024

EXECUTIVE SUMMARY
Company profile: SHELL PLC
Shell plc, formerly known as Royal Dutch Shell plc, is an
energy and petrochemical company headquartered in
London, the United Kingdom. Founded in 1907, it is now Market Market Shares
Ticker Industry
Sector Cap Outstanding
one of the world’s largest oil and gas companies,
maintaining a significant global presence with operations in
more than 70 countries. Oil and
SHEL.L Commodities $203.76B 6.486B
Gas

Analyst Rating:
At the time of writing, Shell plc’s current stock price is
2891.74 GBp per share. Our comprehensive analysis utilizes RECOMMENDATION
two primary valuation methodologies to forecast the
intrinsic value of Shell.
Rating Last Price Target Price Implied Upside
Our Discounted Cash Flow (DCF) Model suggests an
implied target price of 4373 GBp, indicating that Shell is
DCF: 51.22%
significantly undervalued. With a margin of safety of DCF: 4373 GBp
Strong BUY 2891.74 GBp CCA: 29.95%
51.22%, we have issued a “Strong BUY” rating for Shell CCA: 3758 GBp
plc, as our analysis demonstrates that Shell’s current market
price does not fully reflect its future growth potential.

In our comparable companies analysis (CCA), the median

Price-to-Earnings (P/E) ratio for these companies is
approximately 11.14x, while Shell’s current P/E stands at
4.2x. We derived an implied share price of 3758 GBp,
representing a potential upside of approximately 29.95%
from the current market price. Both analysis supports our
thesis that Shell plc is a “Strong BUY”

Key Assumptions:
Shell’s intrinsic value is based upon our conservative view
on the industry, and we projected an assumed average
annual industry growth of 4.79% over the upcoming four-
year period, starting in 2024. This growth expectation is 52 - Week Range (GBp)
informed by current market trends and future industry
forecasts, taking into account both current

We have determined a Market Risk Premium of 9.75%, 2,200 2,360 2,520 2,680 2,840 3,000
which is significantly above the norm. This assessment is
based on a detailed examination of various economic and
geopolitical factors that have emerged in recent years
contributing to increased market volatility and risk. the HISTORIC PERFORMANCE
heightened risk premium reflects the substantial
uncertainties currently facing the global markets and
underscores the rigorous and prudent nature of our YTD 1-Yr 5-Yr Max
valuation approach for Shell plc.
+12.39% +17.60% +18.68% +142.07%
Key Risks
In light of recent events such as geopolitical tension and
war, crude oil and gas prices will be volatile. Additionally,
future projects face both internal and external risks (e.g.
investments, political, legal and environmental). Shell
would look towards strategic, operational, HSSE (Health,
Safety, Security, Environmental) and conduct related risks,
outlining proactive measures to manage these risks
effectively. Governance frameworks, compliance programs
and risk assessment play key roles in mitigating potential
adverse outcomes.

Source: Financial Times

COMPANY
COMPANYOVERVIEW
OVERVIEW
Business Activity and Segments Downstream is the largest segment regarding revenue and free
cash flows accounting for 50.9% of all third-party revenues.
Shell plc is one of the most important players in the energy Despite its significant contribution in revenue, this segment faced
sector, operating vertically in over 70 countries, spanning challenges in generating marginal positive free cash flow, recording
the complete spectrum of the oil and gas industry as well as a surplus of $3.34 billion for the year, verses 34.7% of independent
the broader energy and petrochemical sectors. earnings from Integrated Gas and free cash inflows of $17.5
Billion driven largely by liquefied natural gas.
Shell’s integrated operations comprise several key segments,
including upstream operations, midstream and downstream Although only contributing 42% to the total revenue, the upstream
operations. Shell’s diversified and vertically integrated segment achieved free cash inflows of $21.5 billion. This
model allows it to manage a robust value chain that spans substantial inflows were primarily due to aggressive investment in
initial resource extraction to final product delivery, exploration and extraction activities, which are foundational to
positioning it as a pivotal entity in the global energy market. Shell’s long-term growth strategy in this segment.

INTEGRATED GAS AND UPSTREAM DOWNSTREAM, RENEWABLES AND PROJECT & TECHNOLOGY
ENERGY SOLUTIONS
Engages in the exploration, Encompasses the marketing, Manages major projects
extraction, and development sales and distribution of both whilst driving innovation
of crude oil, natural gas, raw and refined energy via its research and
and natural gas liquids products. Aims to meet the development activities.
activities. evolving energy needs of
customers.

Business Strategy Management

STRATEGY 1: GLOBAL PRESENCE AND EXECUTIVE/BOARD CHANGES
DIVERSIFICATION
The executive change was last announced in August 2023,
Shell leverages its presence in more than 70 countries to which later saw an increase in share price until October
benefit from geographic diversification, reducing risks 2023. With a management average tenure of 1.6 years, there
linked to regional economic fluctuations and geopolitical might be further announcements in the movement of the
uncertainties. The company's diverse portfolio, covering management team during the Annual General Meeting
upstream, downstream, and renewable energy assets, offers scheduled on 21 May 2024, thus possibly affecting future
stability through commodity cycles and energy shifts. share prices.

Financials
STRATEGY 2: TRANSITION TOWARDS
SUSTAINABILITY FINANCIAL STRENGTH AND SHAREHOLDER
RETURNS
With an ambition to achieve net-zero emissions by 2050,
Shell plc has employed the Powering Progress strategy, Shell plc boasts a strong financial position, with AA credit
aiming to generate shareholder value by increasing metrics through the cycle and a low debt-to-equity ratio of
investments in renewable and low-carbon energy solutions 28.6%. It has also been prudent in its capital allocation, by
across its three business segments in a disciplined manner. exercising disciplined investments, cost, and operational
management to ensure strong cash flows. Additionally, it
STRATEGY 3: MERGERS AND ACQUISITIONS aims to provide enhanced shareholder distributions of 30-
40% of its cash flow from operations, at an approximately
As of April 2024, Shell plc and Saudi Arabian Oil Company 4% growth rate annually.
(Saudi Aramco) are reportedly in the final stage of talks to
buy the assets of Temasek-owned liquefied natural gas
(LNG) trading firm Pavilion Energy. According to an
industry source, Pavilion Energy has a decent portfolio
from a long-term volumes perspective, which would allow
Shell to expand their massive portfolio further.

Major Institutional
Shareholders
 INDUSTRY ANALYSIS
The energy landscape continues to be shaped by four disruptors: geopolitical factors, macroeconomic
variables, evolving policies and regulations, and new technology emergence.

Geopolitical factors
In recent times, oil prices have been on the rise due to concerns over On the other hand, the Red Sea Crisis involving
supplies and geopolitical tensions, including wars in Ukraine and the attacks on numerous merchant ships by the
Middle East. On 13 April 2024, Iran’s bombardment of Israel may see Houthis, a militant organisation, has directly
a new war happening. The members of the Israeli war cabinet gathered impacted over 37 percent of British businesses,
on both Sunday and Monday and are broadly in favour of retaliating including just over half of exporters and
but disagree over when and how. However, Israel’s allies are urging for manufacturers. This disruption led to increased
no retaliation. In addition, this conflict raises the possibility of time and cost of deliveries, as Shell and other
disruption in shipping through the Strait of Hormuz, a narrow shipping giants chose to suspend Red Sea
waterway on Iran’s southern border which sees the transport of more shipments and increase shipping distance, pushing
than one-quarter of global maritime oil trade, including crude and oil prices higher.
petroleum products, each day. Disruption or blockages to shipping
traffic in the Strait of Hormuz would be immense as it is the main route
for Middle Eastern oil exporters including OPEC members Saudi
Arabia, Kuwait and the UAE. Escalation in conflict would see oil
prices skyrocket and diplomats believe it is almost inevitable that Israel
will retaliate.

Macroeconomic Variables - Interest Rates

Moving on to interest rates, fuelled by evidence of falling UK inflation and rising real wages for nine months in a row, with the
labour market taking a bounce back with around 204,000 more people employed than last year. Jeremy Hunt, chancellor of
the Exchequer, raised the possibility of further tax cuts and Bank of England rate reductions in the summer or autumn as
inflation subsides. However, the International Monetary Fund warns that the Middle East crisis could trigger a new inflation
shock, pushing food and energy prices up again. Therefore, it is recommended to be cautious as uncertainty remains. Hence,
oil demand may potentially increase and see a moderately bullish market.

Evolving Policy and Regulations

The net-zero emissions by 2050 target involving 106 nations, saw governments worldwide allocating US$1.34 trillion in clean
energy since 2020, suggesting strong indication of an energy transition and shift in demand structure in the market. Shifts in
geopolitical and regulatory landscape includes the interplay of OPEC and its partners managing energy supplies, alongside the
situation in the Middle East, can significantly influence the equilibrium of hydrocarbon (petroleum and natural gas) supply
and demand. Other trends to watch include the level of hydrocarbon exports and any other regulatory changes that could
impact clean energy initiatives.
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
The energy landscape continues to be shaped by four disruptors: geopolitical factors, macroeconomic
variables, evolving policies and regulations, and new technology emergence.

“Emergence of New Technology”

Electric Vehicles
At a global level, electric vehicle (EV) sales grew by over 35% in 2023, with one in every seven cars sold being an EV,
representing a shift in the structure of demand, technology adoptions and regulatory policies. For instance: Structural
changes to China’s economy make it so that next year, half of all new cars sold in China are expected to be electric. In 2023,
Shell opened their largest electric vehicle charging station in China, operated by Shell and BYD Electric Vehicle Investment
Limited.

Generative Artificial Intelligence (AI)

The improvement in generative artificial intelligence, which is increasingly being adopted in the oil and gas industry, could
lead to immediate cost reduction, enhanced process efficiency, creation of new revenue streams and accelerating
innovations. The Deloitte AI Institute defines generative AI as “a subset of artificial intelligence in which machines create
new content in the form of text, code, voice, images, videos, processes, and even the 3D structures of proteins”. To expand,
a 200,000 barrels per day offshore platform experiencing about 12 hours of unplanned downtime can result in a deferred
production worth up to US$8 million. Generative AI can go beyond traditional AI by generating comprehensive
maintenance plans, task lists and real-time recommendations. This not only helps to curb unplanned downtime but also
minimises resource wastage caused by equipment failures, thereby extending the lifespan of assets. Additionally, increased
revenue generation could be achieved by utilising generative AI to generate missing or incomplete samples, refining
interpretations and elevating overall data quality in seismic data analysis, an essential tool to extract oil. The collaboration
between Shell and SparkCognition, for instance, employs deep learning for subsurface imaging, thereby unlocking new
areas and drastically shortening exploration timelines from nine months to less than nine days.

Furthermore, it could help expedite the development of new solutions by enabling rapid testing of new ideas and concepts.
For example, generative AI applications can accelerate the production of diverse materials with higher efficiencies and
reduced energy and material consumption, fast tracking the experimental process.
INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
"Oil prices Oil has been trading mostly in the range of $75 and $85 per barrel for most of last year.
However, Brent crude, a global benchmark, ticked above $85 per barrel after Russia
may remain announced oil cut production. When Saudi’s commitment to oil cuts of 1 million barrels
per day was announced in September, prices reached almost $100. The market rose
stable." again on October 7th when Hamas attacked Israel but each time, prices quickly returned
to the $75 and $85 range.

There are two reasons why traders expect relative stability in oil
prices in 2024:
1. Supply 2. Ample Spare Production Capacity
Oil production is now less concentrated in the Middle East America’s Energy Information Administration
than it has been for much of the past 50 years, from estimates that OPEC’s core members have around
drilling 37% of the world’s oil in 1974 to 29% today. 4.5m barrels per day of spare capacity, motivating
Production is also less concentrated among members of traders to believe that OPEC’s cushion can soften
OPEC. Oil from Russia, the world’s third-largest the blow of supply disruptions.
producer, has continued to flow despite restrictions from
the West, which imposed a price cap of $60 per barrel on
Russian exports of seaborne crude.

Competitors
Shell’s main competitors include BP (BP), TotalEnergies (TTE), Exxon Mobil (XOM), Chevron (CVX) and several others.
Shell and BP are both large-cap energy companies; by comparing the two, Shell has higher revenue and earnings than BP
and Shell is currently underperforming, suggesting a potential future upturn. Furthermore, Shell poses as a strong market
player with the largest market cap in the FTSE100.

Shell BP

Source: Financial Times

 VALUATION
Comparable Company Analysis
The primary goal of this analysis is to derive a relative
valuation multiple that accurately reflects Shell's financial
and operational metrics in the context of its industry. By
comparing these metrics with those of selected peer
companies, we can identify discrepancies in valuation that
may signify overvaluation or undervaluation, thus guiding
potential investment decisions.

Our selection of peer companies for this analysis is based on

several criteria:

Operational Similarity: Companies involved in similar

segments of the energy and petrochemical industries,
including upstream, midstream, and downstream
operations.
Graph: FTSE100 vs Shell 5Y Stock Price Change (Google)

Market Presence: Companies with a comparable

geographical footprint and market penetration.

Financial Metrics: Companies with similar financial

structures and performance metrics, ensuring that the
comparisons are relevant and meaningful.

Valuation Multiples
EV/EBITDAX ratio compared to peers like
EV/LTM EV/LTM
Competitors P/E EV/EBITDAX Chevron and Exxonmobil may suggest the
EBITDA Revenue
market is undervaluing its exploration-adjusted
Shell 2.34 7.48 0.51 2.28 earnings. This could be an indicator of a value
investment or a sign that the market has
Petrobras 1.32 8.36 0.67 1.29 concerns about the profitability of Shell’s
exploration activities. A higher ratio may imply
Chevron 5.62 12.99 1.32 5.51 more efficient exploration activities, future
productive potential, or a market premium for
BP 1.93 6.83 0.4 1.89 exploration success.

Exxonmobil 3.8 11.14 1.17 3.77

The Price-to-Earnings (P/E) ratio for Shell is
7.48, which is moderate relative to the peer
TotalEnergies 2.93 7.68 0.67 2.9
group. It is lower than that of Chevron and
Exxonmobil, which have P/E ratios of 12.99 and
11.14, respectively, implying that Shell's shares
are less costly for each unit of net income
earned. This could be attractive to value
investors seeking profitable companies at a
lower price point.

It is crucial to note that the lower 25th percentile

P/E Ratio implied price at 24.28, compared to
Shell's Enterprise Value (EV) to Last Twelve Months (LTM) EBITDA ratio stands the higher 75th percentile at 81.32, illustrates a
at 2.34, which indicates it is being valued at a lower multiple compared to most significant range, pointing to different investor
peers. This suggests that the market may be undervaluing Shell’s earning potential,
especially when contrasted with Chevron's significantly higher multiple of 5.62. The sentiments and expectations within the market.
lower EBITDA multiple can be seen as an indicator of a potentially undervalued Similarly, the EV/LTM EBITDA and EV/LTM
stock or one that carries lower perceived risk by the market. Chevron presents an Revenue ratios reinforce this perspective, with
abnormal EV/EBITDA compared other peer firms, mostly due to a low current 12- their respective 25th and 75th percentile implied
month EBITDA caused by high recent purchases and low revenue during 2023. prices indicating a broad valuation spectrum.
The EV/EBITDAX multiple adjusts the traditional EBITDA multiple to account
for exploration costs, which are significant in the oil and gas industry. Shell’s lower -
 VALUATION
Discounted Cash Flows Projection
We have also decided to use a discounted cash flow model to determine Amazon’s intrinsic value.
Amazon’s relatively smooth historic revenue and earnings growth allow the discounted cash flow
model to be an accurate assessment of the company’s fair value.

Forecast Assumptions
ASSUMPTION 1: Oil Price and Production ASSUMPTION 5: Capital Structure (WACC)

In 2023, the average global benchmark oil price for Brent Given the constraints in our analysis, we decided to assume
crude was approximately $83 per barrel, a decrease from a constant capital structure over the forecast period. Thus
$101/bbl observed in 2022. This reduction is attributed to a effects like the tax shield arise from holding large amount of
less volatile market following the heightened volatility debt may impact the valuation of the company. The tax
primarily driven by geopolitical disruptions, notably the shield effect, which arises due to interest deductions on debt,
Russian invasion of Ukraine and other factors mentioned can significantly influence the valuation by reducing the
above. Shell’s oil and gas production available for sale was company’s taxable income and thereby its tax liability.
recorded at 2791 boe/d. This figure represents a critical Despite this simplification, our approach remains aligned
input for our cash flow projections, reflecting the company’s with a conservative view to the valuation.
operational output capacity under current market
conditions.
CONCLUSION
ASSUMPTION 2: Revenue Growth Our model yields a net present value of cash flows of
$150.86 billion and a terminal value with a net present value
We anticipate revenue growth to be strong in the near-term. of $257.25 billion. Combined with cash and cash equivalent,
We have forecasted a constant 4.79% YoY revenue growth and deducting total debt and non-controlling interests,
for the upcoming 4-years. This value is taken from the Shell has a market capitalization of $353.14 billion. With
average industry growth rate of oil and gas industry in 6486 million shares outstanding, our model yields an
Statista. It is likely that Shell will continue to innovate and implied share price of 4373 GBp. With a market traded
grow past 4.79% with its renewables and upstream segment price of 2891.74 GBp, we anticipate 51.22% upside to Shell
initiatives, but its long-term growth capabilities are plc’s current market price.
uncertain. Thus we decided to remain conservative.

RATING: Strong BUY

ASSUMPTION 3: Market Risk Premium
PRICE TARGET: 4373 GBp
We have adopted a Market Risk Premium of 9.74%. This
figure is informed by our assessment of how the market is IMPLIED UPSIDE: +51.22%
currently pricing in risk, particularly in light of recent
geopolitical factors. The Oil and Gas sector, given its global
interconnectedness and reliance on stable geopolitical
conditions, is particularly susceptible to international
incidents. Therefore, a higher MRP is justified as it aligns
with the specific risk exposure of companies like Shell that
operate extensively across various geopolitical landscapes.

Our model addresses the need for a conservative yet realistic

approach to valuation, ensuring that the cost of equity
reflects the true risk investors would face under current
conditions. This assumption is critical for producing a
reliable estimate of Shell's intrinsic value, providing
investors with a robust framework for making informed
decisions.

ASSUMPTION 4: Capital Expenditures and Depreciation

Capital expenditures over 2021-2023 account for an average

of 6.82% of sales, while depreciation and amortization
account for an average of 8.35% of sales. We used the
averages from 2021-2023 to project a constant rate for the
upcoming 4 years.
 RISK ASSESSMENT
Every project entails internal risks like financial, investment, property, and human
Potential risks in resources, alongside external risks such as political, legal, environmental, and market issues.
Information gaps within organizations can lead to information risks, while geological risks

oil and gas projects affect oil and gas extraction. Globalization risks can impact entire industries. Inadequately
regulated oil and gas activities pose significant environmental and safety hazards, including
gas leakage and social conflicts. While such disasters are inevitable, proactive management
measures can mitigate their impact.

Challenges that can impact operations and financial performance:

1) Shifting Energy Landscape: Understanding rules and adjusting to lower-carbon energy systems are crucial due to geopolitical
reasons, the desire for renewable energy, and regulatory changes.

2) Supply Chain Impacts: Weather, delays, and price rises may all disrupt complex supply chains, necessitating proactive
management and robust inventory control.
3) Labor Shortage: There is declining worker availability due to industry swings and distant work arrangements, and effective
recruiting, training, and retention methods are necessary.

4) Market Volatility: Natural catastrophes and global events can interrupt operations, underscoring the importance of solid business
planning, risk management strategies, and business continuity plans.

Factors that impact future performance and investment outlook

1) Strategic Risks: Fluctuating crude oil prices and intense 2) Operational Risks: Uncertainties surrounding proved oil
competition in commodity markets challenge Shell's revenue and gas reserves estimation and health, safety, security, and
and profitability. While a diverse portfolio and scenario environmental (HSSE) threats pose operational risks to
analysis help mitigate price volatility, prolonged periods of low Shell. Any inaccuracies in reserves estimation or incidents
pricing or heightened competition could adversely affect cash such as explosions or spills can lead to reduced profitability,
flows and financial stability, impacting investor confidence and asset impairments, and regulatory repercussions, affecting
the company's investment outlook. investor perceptions and investment decisions.

3) Compliance and Conduct Risks: Risks associated with 4) Macroeconomic Risks: Macroeconomic factors such as
regulatory compliance and conduct in commodity trading and government initiatives promoting electric cars and
antitrust laws could result in financial penalties, reputation geopolitical tensions may influence Shell's cost structure and
damage, and legal liabilities for Shell. While the company market demand. Adverse economic conditions or regulatory
maintains robust compliance frameworks and training changes could lead to project cancellations, delays, or higher
programs, failure to adhere to regulations or ethical standards expenses, affecting future revenue streams and investment
could impact profitability, cash flows, and investor trust, opportunities.
negatively influencing the investment outlook.
APPENDIX
Appendix I: Discounted Cash Flow Model

Appendix II: Terminal Value Appendix III: WACC

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