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Shell’s Forward Valuations Are Below the Peer Average

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Peer comparison

In the earlier part, we looked at Royal Dutch Shell’s (RDS.A) historical valuation trend. In this part, we’ll look at Shell’s forward valuations compared to its peers.

Before we go ahead with a peer comparison, let’s consider the market cap (capitalization) of integrated energy companies. Royal Dutch Shell’s (RDS.A) market cap stands at $145 billion. Exxon Mobil (XOM) and Chevron (CVX) have higher market caps of $321 billion and $166 billion, respectively. The market cap for BP (BP) is the lowest at $94 billion.

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Shell’s forward valuations

Royal Dutch Shell (RDS.A) is now trading at a forward PE (price-to-earnings) ratio of 18.4x, which is lower than its peer average of 20x. BP (BP) is also trading below the average PE ratio. Exxon Mobil (XOM) and Chevron (CVX) are trading above the average. A low oil price outlook is pressuring expected earnings of integrated energy companies, raising their forward valuations.

Crude oil is trading below $40 per barrel, hovering near 11-year lows. It’s expected to stay subdued in 2016. According to the EIA (U.S. Energy Information Administration) and WTI (West Texas Intermediate), the price is expected to average $56 per barrel in 2016, lower than the 2015 level.

Now let’s look at another forward multiple: EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization). EV experiences market volatility, while EBITDA changes due to varying business environments. Usually, all other things being equal, sinking oil prices shrink EBITDA levels of integrated energy companies, and vice versa. So the EV-to-EBITDA ratio captures market sentiment as well as operating performance of an integrated energy company.

Royal Dutch Shell (RDS.A) is currently trading at a forward EV-to-EBITDA of 4.6x. This is lower than the forward EV-to-EBITDA of Exxon Mobil (XOM) and Chevron (CVX) at 7.5x and 6.9x, respectively. This puts Shell in an attractive valuation spot if forward plans materialize according to Shell’s expectations.

If you’re looking for exposure to integrated energy companies, you can consider the Vanguard Energy ETF (VDE). The ETF has 38% exposure to integrated energy sector stocks.

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