Should I buy Shell shares, or am I too late?

Shell shares have been on a steep upward track this year with the oil price soaring. But is it too late to buy Shell stock?

Dr. James Fox

Based in London, James is a freelance investment writer for the Fool UK. He also contributes to business and economics publications, having previously worked as a staff writer and editor. James has a PhD in development studies and has contributed to academic work on global supply chains. He also manages his own investment portfolio.

Published 1 June, 2022 2:54 pm BST

| More on: SHEL

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shell (LSE:SHEL) shares are up 76% over the past year. That’s remarkable when we consider the narrative during the pandemic when people wondered whether there was any value in hydrocarbon stocks.

But with the oil price surging in 2022, Shell and its peers have turned huge profits. Shell’s first-quarter profits were its highest on record. In turn, the share price has skyrocketed from 1,400p per share a year ago, to around 2,360p right now.

So, should I buy Shell stock or am I too late?

Recent performance

In May, Shell reported record first-quarter profits. Adjusted earnings rose 43% from the previous quarter to $9.13bn, beating average analyst forecasts of $8.67bn. Q1 earnings were nearly 300% greater than the $3.13bn reported a year earlier.

Shell also reported a 81% increase in cash flow from operating activities, reaching $14.8bn.

Soaring revenues were driven by an increase in the oil price which has been inflated by Russia’s invasion of Ukraine and sanctions levied on Moscow and Russian businesses. Brent crude hit $124 a barrel on Tuesday — the highest for three months.

Prospects

Firstly, Shell will be hit by a windfall tax relating to its huge Q1 profits, as will other energy firms. Shell said that the Chancellor’s tax “creates uncertainty about the investment climate for North Sea oil and gas for the coming years“.

The windfall tax will remain in place until “normal” conditions in the energy market return or until the end of December 2025.

In all honesty, I’m not sure how this will impact Shell’s operations. Some analysts have suggested it will be a sizeable hit, others have claimed that oil companies can frontload their investment plans to offset the windfall tax.

Shell’s current level of profitability is also dependent on oil prices remaining high. Oil dipped today and most analysts think it will remain just above $100 this year.

But there’s lots of factors at play here. There has been speculation that OPEC may eject Russia from its production calculations, therefore allowing OPEC members to increase their production. However, it’s not clear how much spare capacity there is within OPEC.

I also anticipate China will introduce more lockdowns this year as Beijing attempts to tackle Covid. If we see severe and prolonged lockdowns, this could negatively impact demand for oil.

There’s also some negative forecasts for economic growth in the West. That won’t be good for oil demand.