Shell (LSE:SHEL) shares made gains in early trading on Thursday after the hydrocarbons giant registered record quarterly profits.
But past performance isn’t indicative of future prospects, especially in cyclical industries like oil and gas. So, let’s take a closer look at Shell’s prospects and whether I’d buy this stock for my portfolio.
Strong quarter
Shell doubled its profits in the last quarter, thanks to the surge in energy prices. Adjusted earnings came in at $11.5bn for the three months to the end of June. Adjusted EBITDA came in at $23.1bn in Q2 versus $19bn in Q1.
The oil and gas giant also announced $6bn in share buybacks, which is expected to be completed by Q3 2022 results.
Shell CEO Ben van Beurden told Bloomberg TV on Thursday morning that he thought the oil market would stay tight, noting the limited capacity in the OPEC+ nations and North American shale production.
Van Beurden claimed that the company was doing its best to help consumers but noted the issues were ultimately related to supply and the make-up of the UK energy sector.
He said that Shell was committed to bringing more supply on board and noted the Jackdaw project in the North Sea, which will have peak production of 40,000 bpd.
Pressures on oil and gas
The profitability of oil and gas companies is heavily linked to the spot price of hydrocarbons.
The prices of oil and gas have surged this year, primarily due to Russia’s war in Ukraine, but also because demand has picked up following the pandemic, and supply is still catching up.
Analysts are very much split on where oil will go next. Citigroup analysts claim that oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if the global economy slumps.
However, JP Morgan analysts have warned that crude oil prices could reach a $380 a barrel if Russia were to introduce its own sanctions or cut supply, similar to what’s already going on with gas. With Nordstream only running at 20% right now, natural gas prices are currently 10 times higher than they normally are at this time of year.
I’m anticipating that oil will soften further this year amid more Chinese lockdowns and negative economic forecasts in the West.
One thing is for sure, with benchmark prices around $100, Shell will want to be pumping as much oil as it can.
Would I buy Shell shares?
Shell’s buyback suggests that management thinks its shares are undervalued and that the best use of its capital right now is to buy back its own stock from investors.
And in the long run, I’m pretty bullish on oil stocks as I contend that we’re entering a period of scarcity, characterised by increased competition for commodities. This should be good for companies like Shell.
However, I wouldn’t buy right now. I think there should be better entry points later this year if oil is pushed lower by a faltering global economy.