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Shell’s Valuations after the Current Slump

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Dec. 14 2018, Updated 7:30 a.m. ET

Shell’s valuations

Royal Dutch Shell’s (RDS.A) forward valuations showed mixed signals—compared to peers’ averages. In this part, we’ll discuss Shell’s forward PE ratio.

Shell trades at the forward PE ratio of 9.2x—below its peer average of 10.7x. Total (TOT), Equinor (EQNR), and Petrobras (PBR) also trade below the peer average. Currently, Total, Equinor, and Petrobras trade at forward PE ratios of 9.2x, 9.1x, and 7.6x, respectively.

Shell trades at a forward EV-to-EBITDA multiple of 4.5x—above the peer average of 4.2x. ExxonMobil (XOM), Chevron (CVX), and Suncor Energy (SU) trade above the peer average at 6.4x, 5.1x, and 5.4x, respectively.

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What do Shell’s valuations imply?

Shell trades below the forward average PE ratio but above the forward average EV-to-EBITDA multiple. Although Shell’s valuation has declined in the current quarter, its EV-to-EBITDA multiple is still above the peer average. A few years ago, Shell’s PE ratio and EV-to-EBITDA multiple were below the peer average. The better situation is likely due to the company’s stronger financials.

Shell’s debt position seems to be improving. In the third quarter, Shell’s total debt fell by $10 billion year-over-year, which denotes a recovery in its debt position. Shell’s total debt-to-total capital ratio and net-debt-to-EBITDA ratio were below their respective industry averages, which points to a favorable scenario.

Shell’s cash flows have also risen. In the first nine months, the company’s cash flows were in a surplus after covering its capex and dividend outflows—a favorable situation. Shell announced the second tranche of its $25 billion share buyback program, which we discussed earlier.

Overall, Shell’s strengthening debt and liquidity position has been supporting its valuations.

To learn more, read Here’s How Shell Is Working to Strengthen Its Financials.

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