Shell’s (LON: SHEL) share price has fallen away in recent weeks. It currently trades at 1600p versus a one-year high of just over 1800p recorded in October. However, it is still up by around 30% over the past year versus a 14% gain for the FTSE 100 index.
Of course, the outlook for the wider oil and gas sector has improved significantly in recent months. For example, the price of oil has risen from $43 a year ago to in excess of $70 per barrel at the present time. This has naturally provided more profitable operating conditions for Shell and its peers that were reflected in its latest quarterly results. Indeed, it recorded its highest ever cash flow from operations (excluding working capital) figure of $17.5bn.
Clearly, the oil and gas industry faces an uncertain future. Historically, it has been viewed as a hedge against higher inflation by some investors. Therefore, it could be argued that it offers some appeal as a result of low interest rates and monetary stimulus programmes contributing to rising inflation in the US and UK.
However, other investors may argue that the world’s shift towards cleaner forms of energy has been accelerated by the pandemic. As such, Shell could face an uncertain period as it seeks to pivot from oil and gas to low-carbon forms of energy.
Even though this switch may be necessary, in the meantime demand for oil is widely expected to remain relatively robust. In fact, the International Energy Agency (IEA) forecasts that oil demand in 2021 will be 6% higher than the previous year. It then expects further growth to take place in 2022, with demand for oil expected to be 3.4% up on 2021’s level.
This could provide upbeat operating conditions for Shell and allow it to reinvest in renewable forms of energy. The firm has successfully reduced net debt to $57bn from $74bn a year earlier. It is also making asset disposals, distributing capital to investors and seeking to halve the absolute emissions from its operations by 2030.
In terms of valuation, Shell currently trades on a forward price-earnings ratio of around 10. This suggests that while it faces a future of uncertainty that could pose challenges as it changes the profile of its asset base, its share price includes a margin of safety.
Moreover, its potential as an inflation hedge and the prospect of improving operating conditions as the global economic recovery continues and demand for oil rises may allow it to deliver further outperformance of the FTSE 100.