Shell (LSE:SHEL) Stock May Trade At A Discount As LNG Expansion Looms

Shell has delivered a strong run in recent years, and with cash flows in focus, the question now is whether that share price is fully supported by the stream of money the business is expected to generate.

• Over the past 5 years Shell has returned 160.2%, which puts real weight on the issue of whether the current valuation is grounded in its cash flow profile or in more cyclical market forces.
• Recent headlines around record refining margins, LNG Canada expansion plans and potential regulatory fines in Kazakhstan all feed into how durable Shell's cash generation may be and how lumpy future investment needs could become.
• What if you looked at Shell through its earnings instead? See what Shell's 11.1x P/E says about the price.

The issue now is whether Shell's current share price can be justified by the cash flows implied by a Discounted Cash Flow (DCF) view of the business.

Shell is only one way to approach this theme. It can be useful to compare its cash flow story with companies in 7 high quality undervalued stocks

Is Shell Still Cheap on Cash Flow?

The Discounted Cash Flow (DCF) approach here focuses on the cash Shell can return to shareholders over time. Latest twelve month free cash flow sits at about US$29.2b, and the projections used in the model assume this cash engine does not rely on aggressive expansion but on relatively steady cash generation into the next decade.

Those future free cash flow estimates stay in a tight band, which fits a business already generating substantial cash rather than one in an early high growth phase. Against a current share price of £37.94, the DCF projections put Shell's estimated intrinsic value substantially above the current share price. The recent record refining margins and LNG Canada expansion plans help explain why the market is still pricing the stock below what its cash flows support. Find out what Shell could be worth using our Discounted Cash Flow (DCF) estimate.

The Shell Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where this valuation puzzle for Shell leaves off, since they spell out which future paths for growth, margins and earnings would need to hold for the shares to be worth materially more or less than today. Each one sets up Shell's implied fair value as a thesis about the business that you can revisit over time as new data comes through, and they sit on the company’s Community page.

Shell investors are split between those who see disciplined LNG growth and cash returns as sufficient and those who worry that optimism already prices that in.

Bull case: roughly fairly valued

"Shell's aggressive high-grading of its portfolio (divestment of non-core assets in Chemicals, Retail, and Renewables, and targeted upstream investments in deepwater and LNG) is redirecting capital to higher-return assets and geographies..."

Discover why this Narrative puts Shell at roughly fairly valued.

Bear case: 7% overvalued

"The most fundamental feature that distinguishes Shell from its competitors (ExxonMobil, Chevron, BP, TotalEnergies) is its unparalleled trading capability..."

Explore why this Narrative puts Shell at 7% overvalued.

Shell's valuation still hinges on one unanswered issue

All the cash flow work still depends on who is steering Shell and what they are rewarded for, because those incentives can shape every capital allocation choice from here. See who runs Shell and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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