Down 8% for the month with a P/E of 8.1, is Shell’s share price in deep bargain territory?

As the price of oil falls, i A shell (LSE: SHEL) share price is undeniably trailing. I FTSE 100 the energy giant fell 8.21% last month. That leaves it trading at the same level as last year.

Shell’s profits fell from a record $40bn at the height of the global energy crisis in 2022 to $28.3bn in 2023, a drop of a third. But that was still the second highest number since 2011. So is the recent decline a buying opportunity?

Oil is a volatile sector, so I prefer to buy when stocks are down rather than up. I resisted the chase BP and Shell up when oil prices rise in 2022. From my understanding, I should dive in and buy them today.

How confident can we be about Shell?

With Shell shares trading at just 8.01 times earnings, about half the FTSE 100’s average of 15.3 times, they look tempting.

Just because a company’s stock price has gone down, doesn’t mean it won’t continue to go down. There are good reasons why the oil company is down in the dumps today, as China’s economy slows demand, and a soft economic recovery in the US is far from guaranteed.

Also, OPEC+ members seem to want to increase production, despite (or even because of) today’s low prices. This can make a bad situation worse for producers. Last month, OPEC lowered its oil demand forecasts for 2024 and 2025.

Oil prices have risen slightly over the past few days, with Brent crude reaching $73.16 a barrel. Investors are pinning their hopes on falling interest rates, which they hope will boost global stability. We will see.

The good news is that Shell can break even with oil reaching $30 a barrel. I don’t expect the price to drop anywhere near that.

Plenty of shareholder rewards

Shell is not the unstoppable revenue machine of yesteryear, sadly. The trailing yield of 4% is slightly better than the FTSE 100 average of 3.8%. However, earnings per share have recovered slightly after being revised down to 65 US cents per share in 2020. Shell increased this to 89 cents in 2021, $1.04 in 2022, and $1.29 in 2023.

The board recently launched another $3.5bn buyback tranche, covering just three months. So it clearly thinks its shares are well-priced.

Shell remains under constant pressure from green campaigners, who want it to cut fossil fuel production and divert more of its profits to renewables. The transition to electric vehicles has hit a few bumps in the road, but the long-term path is still clear, and so is Shell’s challenge.

Stocks don’t go down for no reason. Oil and gas production is a risky business at the best of times. I am willing to buy Shell shares at today’s price. But I accept that I may have to experience some short-term pain before I can enjoy the long-term benefits.