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Why Shell’s Valuation Has Risen

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Shell’s price-to-book value

In this part, we’ll evaluate Royal Dutch Shell’s (RDS.A) historical valuation. Let’s begin by looking at its price-to-book multiple.

Volatile oil prices have led to many projects becoming unviable for integrated energy companies Shell (RDS.A), BP (BP), Petrobras (PBR), and Chevron (CVX), resulting in impairments in their upstream segments and affecting their book value.

Shell’s price-to-book multiple stood at an average of 1.0x between 4Q14 and 4Q16. The ratio moved down from 1.2x in 4Q14 to 1.1x in 4Q16, but was higher than the historical average. The fall in Shell’s stock price was steeper than the fall in its book value per share.

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Shell’s valuation

From 4Q14 to 4Q16, Shell’s EV-to-adjusted EBITDA (enterprise value to adjusted earnings before interest, tax, depreciation, and amortization) ratio stood at an average of 7.7x. In the past few years, Shell’s weaker EBITDA have resulted in a higher valuation. In 4Q16, Shell traded at an EV-to-EBITDA ratio of 13x, higher than the historical average. For exposure to larger companies, you could consider the iShares Core S&P 500 ETF (IVV), which has a ~7% exposure to energy sector stocks.

In the past few years, Shell’s earnings have fallen more dramatically than its stock price, meaning that most investors are holding onto the stock despite the fall in earnings. It is likely that investors foresee Shell’s strategy of restructuring by reducing costs, optimizing capex, and selling non-core assets yielding favorable results. Plus, investors are likely anticipating synergies and benefits from the acquisition of BG Group to pour in. Investors probably see Shell as an energy company that will earn more profits with any surge in oil prices. In the next part, we’ll see how Shell’s stock price correlates with WTI (West Texas Intermediate) prices.

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