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Is Shell’s Valuation Getting Stronger?

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Jun. 4 2019, Published 9:02 a.m. ET

Shell’s valuations

Royal Dutch Shell’s (RDS.A) forward valuations have been getting stronger compared to its peer averages. First, we’ll discuss the company’s forward PE ratio.

Shell trades at a forward PE ratio of 10.3x, which is below its peer average of 11.3x. Total (TOT), Equinor (EQNR), BP (BP), and Petrobras (PBR) also trade below the peer average. Currently, they trade at forward PE ratios of 8.9x, 9.8x, 10.8x, and 8.8x, respectively.

Shell trades at a forward EV-to-EBITDA multiple of 4.9x, which is above the peer average of 4.6x. ExxonMobil (XOM), Chevron (CVX), and Suncor Energy (SU) trade above the peer average at 6.7x, 5.8x, and 5.6x, respectively.

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What do Shell’s valuations imply?

Shell trades below the average forward PE ratio but above the average forward EV-to-EBITDA multiple, which points to the stock’s rising valuation. A few years ago, both of these ratios were below the peer average. The improving valuations are likely driven by strengthening financials.

Shell’s first-quarter earnings fell marginally. However, the fall was the lowest compared to the company’s peers. Shell’s first-quarter earnings beat analysts’ estimate. The company’s upstream, integrated gas, and downstream earning rose despite lower oil prices, narrower refining margins, and weaker chemical margins.

Shell’s earnings increased due to the strength of the integrated earnings model that the company built over the years. Shell has restructured its assets to only keep competitive assets. The impact of the restructuring exercise was evident in the company’s first-quarter earnings. Shell’s segmental earnings rose despite harsh business conditions. Shell’s strategy to reduce costs, optimize the capex, sell non-core assets, and deliver new projects according to the schedule and within the budget supported its earnings.

To learn more, read Shell: Stronger in Q1 Due to Its Strategy.

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