While integrated hydrocarbon energy stalwart Shell stock (NYSE:SHEL) may seem an anachronistic enterprise, the current juncture bodes very well for SHEL. Undeniably, it’s a cynical narrative. With geopolitical flashpoints sprouting in multiple regions, the implied risk of oil supply chain disruptions could lift Shell stock. However, the company also benefits from its pivot toward green energy solutions.
Perhaps the buy case for Shell stock was best demonstrated with last Friday’s upside response. SHEL closed up nearly 1.5% to finish the April 19 session. That was inline with similar performances by integrated oil giants Chevron (NYSE:CVX) – up 1.54% — and Exxon Mobil (NYSE:XOM), which gained about 1.2%.
Of course, what made the upside performance conspicuous was the broader equity indices struggles. Notably, the benchmark S&P 500 fell below the 5,000 level, sparking fears of a stock market crash. However, what worries the rest of the market may end up cynically helping the hydrocarbon industry. As a result, I’m bullish on Shell stock.
Geopolitics Should Move the Needle for Shell Stock
Although it’s hardly a comfortable topic, it also can’t be avoided: the current geopolitical landscape should be net bullish for Shell stock.
Obviously, the immediate spotlight focuses on tensions in the Middle East. On April 13, Iran fired 300 missiles and drones against Israel, in response to the bombing of Iran’s embassy in Syria. Iranian government officials blamed Israel for the attack. Subsequently, Israel launched its own strike as a response, which sets up a dangerous situation.
To be fair, the Israeli strike was narrow in scope. Further, the Associated Press reports that the two nations have played down the incident. This suggests that they’re seeking to cool tensions, which would be comforting news amid a troubling backdrop. Still, as The Wall Street Journal mentioned, a miscalculation could send the tenuous situation spiraling out of control.
Naturally, Iran’s geographic location to critical oil supply routes present broader disruption concerns. With inflation already a hot talking point, a major incident could send oil prices skyrocketing. Cynically, Shell stock would represent one of the few investments that may benefit.
However, it’s not just the Middle East that’s on the radar. In Europe, Russia’s invasion of Ukraine shows no sign of abating. In an effort to slow the Russians, Ukrainian forces have begun striking oil refineries and factories deep inside Russia.
From a military strategy standpoint, the move makes perfect sense. Warfare is about logistics and few things are more disruptive than hits to fueling infrastructure. However, it can’t be avoided that this action – combined with a possible escalation in the Middle East – may lead to higher prices.
Again, such a backdrop has few winners outside of investments like Shell stock.
SHEL’s Push for Alternatives a Timely One
Back during the initial invasion of Ukraine, the sudden disrupt of global energy supplies forced a sharp reality check: western nations can’t trust authoritarian regimes such as Russia’s. As a result, many countries prioritized ending their dependence on Russian hydrocarbons. This directive included turning to renewables.
Part of the discussion to mitigate said dependency involves hydrogen. While not entirely a renewable energy source, hydrogen provides an alternative to natural gas. Further, in 2022, Shell announced plans to build what it terms Europe’s largest renewable hydrogen plant. The effort aligns with the company’s wider goal to become a net-zero emissions enterprise by 2050.
Finally, Shell recently announced that it’s closing 1,000 gasoline stations to focus on charging solutions for electric vehicles. Granted, the EV space is currently suffering from a demand fallout. Still, over the long run, this move could position Shell stock favorably, assuming EVs become the future of powered mobility.
Compelling Valuation Picture
Lastly, Shell stock presents an excellent idea for investors looking for undervalued opportunities. At the moment, shares trade at only 0.76X trailing-year revenue. That’s noticeably lower than the sector median 1.18X.
But that’s not all. For the current fiscal year, analysts are projecting revenue of $344.98 billion on average. That’s up 9% from the prior year’s tally of $316.62 billion. Should disruptions boost the price of critical hydrocarbons, it’s more than possible that the high-side estimate – calling for sales of $443.5 billion – would be in the cards.
At that level, Shell stock would trade for only 0.54X revenue. Therefore, an already attractive idea would look even more compelling.
The Takeaway: Geopolitics Gifts a Bullish Take for Shell Stock
With the current geopolitical framework carrying the serious potential to spike the cost of oil and other hydrocarbons, Shell stock seems a controversial but intriguing idea. Indeed, its solid performance last Friday amid broader red ink appeared to confirm the optimistic thesis. Plus, with SHEL undervalued relative to trailing and forward revenue, it’s worth a look for concerned investors.
— Josh Enomoto
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Source: Investor Place