The share price of Shell (LSE: RDSB) has fallen by 17% in the last year. Now could be a fantastic opportunity to buy it. A key reason for that is the margin of safety now on offer with Shell trading on a price-to-earnings growth (PEG) ratio of just 0.2. This indicates that it offers excellent value for money and while its forecasts are heavily dependent on the price of oil, even if the price of black gold falls, Shell’s share price could remain relatively stable.
Clearly, Shell’s falling share price over the last year puts off a lot of investors as it indicates that investor sentiment is on the decline. However, it also means that there may be more capital gain potential and since it’s usually the aim of investors to buy low and sell high, Shell’s relatively cheap share price should be seen as a key reason to invest right now.
In addition to a low valuation, Shell also has a sound financial outlook. This is largely because of its sheer size and scale, with Shell’s cash flow and modest debt levels highlighting its stability and robust outlook versus many of its oil and gas sector peers.
Strength and stability
Although Shell isn’t immune to the effects of a downturn in the price of oil, it does seem to be better equipped than even most of its similarly-sized rivals. And with the company having strengthened and diversified its asset base through the acquisition of BG, it appears to offer an even more stable and upbeat outlook.
With Shell’s cash flow already being strong, it may not have needed to cut back on costs as dramatically as it has. However, with exploration spend and investment being reduced, Shell seems to be planning for a long-term outlook where the price of oil remains low. This seems to be a sensible approach to take and should mean that Shell is able to deliver high levels of profitability even when many of its sector peers are struggling with their financial performance.
As well as a low valuation and sound financial strength, Shell also offers the opportunity for investors to take part in the recovery of the oil price. While not a guaranteed event, the current supply/demand imbalance is unlikely to last in perpetuity. That’s because smaller operators with higher costs than Shell are likely to reduce output as economics dictate that $50 oil is simply not profitable for a number of producers. And with demand for oil and gas from emerging markets set to rise over the coming years, the equilibrium price for oil is likely to be significantly higher than the current $50 per barrel.
Clearly, the rise of the oil price is unlikely to be a smooth one. However, for investors who can think long term, buying Shell now could lead to significant gains.