Morningstar

Shell: Not Enough To Close Gap With U.S. Peers, but Going in Right Direction

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Securities In This Article
Shell PLC
(SHEL)
Shell PLC ADR (Representing - Ordinary Shares)
(SHEL)
Shell PLC
(SHELL)

At Shell’s SHEL first capital markets day in two years, new CEO Wael Sawan and his team sent the right message—that returns would take priority over growth—but it was likely found wanting by investors. Although, we believe the key actions accompanying the message—reduced spending and increased distributions—are a positive and crucial step, they are unlikely to be enough to close the valuation gap with U.S. peers. Furthermore, the long-term outlook remains uncertain with most guidance items only covering through 2025. However, we believe the new team has Shell heading in the right direction and places the company as one of the more compelling options among European integrated oils. Incorporating the updated items into our model, leaves our fair value estimate and moat rating unchanged. Shares are only trading at a modest discount, but they are supported by a relatively high shareholder yield.

The tone set by Sawan and his team were likely the most important element of the update. We have previously argued the Shell and other European integrated oils’ discount to U.S. peers Exxon and Chevron was a result of several factors, but differences in capital allocation and energy transition strategies were the most relevant and addressable. By stressing that all projects, most notably low carbon power, must compete for capital and earn adequate returns, Sawan and his team sought to address this issue.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Allen Good, CFA

Director
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Allen Good, CFA, is a director, Europe, for Morningstar*. Based in Amsterdam, he covers the oil and gas industries as well as manages a team of multi-industry analysts. He is also chair of the Morningstar Research Services Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat ratings issued by Morningstar. In this role, he is responsible for ensuring consistent application of Morningstar’s Economic Moat methodology across sectors and regions as well as updating and revising the methodology. His specialty is global integrated oils such as Exxon, Chevron and Shell and US independent refiners such as Valero and Marathon Petroleum. He also contributes to developing hydrocarbon price and petroleum product margin forecasts used in valuation models.

Before joining Morningstar in 2008, He performed merger and acquisition advisory work for a middle-market investment bank. Before that, he spent several years at Black & Decker in various operational roles, primarily focused on manufacturing and distribution.

Good holds a bachelor’s degree in business from the University of Tennessee and a master’s degree in business administration from Kenan-Flagler Business School at the University of North Carolina. He also holds the Chartered Financial Analyst® designation.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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