uploads///Historic Valuations

Shell’s Valuation: Higher than Its Historical Average?



Shell’s valuation trend

Royal Dutch Shell (RDS.A) traded at an average adjusted PE (price-to-earnings ratio) of 13.9x from 4Q13 to 4Q15.

Shell’s PE has shown an uptrend in the past two years. In 4Q15, the stock traded at a PE of 16.6x. In the past four quarters, Shell saw its profits squeezed due to lower upstream earnings. Lower earnings resulted in a steep rise in Shell’s PE. Shell currently trades at a PE of 18.5x, higher than the historical average.

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Shell’s EV-to-EBITDA and price-to-cash flow

From 4Q13 to 4Q15, Shell’s EV-to-adjusted EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and price-to-cash flow ratios stood at averages of 6.1x and 5.4x, respectively.

As discussed above, in the past four quarters, Shell saw lower EBITDA, translating into lower earnings and subdued cash flows from operations, resulting in higher valuations. Currently, Shell is trading at EV-to-EBITDA and price-to-cash flow ratios of 9.2x and 5.6x, respectively, higher than its historical valuations.

In 4Q15, Shell traded at a 5x price-to-cash flow ratio. Shell’s peers Suncor Energy (SU), Chevron (CVX), and BP (BP) traded at price-to-cash flow ratios of 7.5x, 8.6x, and 5x, respectively. For exposure to the integrated energy sector, you can consider the Vanguard Energy ETF (VDE). The ETF has ~40% exposure to integrated energy sector stocks, including XOM and CVX.

The valuation study reveals that Shell is trading at valuations higher than its historical averages.

Why does Shell trade at higher valuations?

In the past two years, especially in 2015, Shell’s earnings have fallen steeply compared to the falls in its stock price. This means that the majority of investors are holding onto the stock despite the turmoil in the oil and gas industry. Investors may view Shell’s strategy of restructuring, divestment, capex, and cost reduction as a sound way to weather the low-oil-price cycle.

To determine how Shell is positioned compared to its peers in terms of forward valuation, move on to the next part of the series.


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