Should I buy Shell shares as oil prices surge?

Two white male workmen working on site at an oil rig

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Shell (LSE: SHEL) shares have had a great run recently. But they still look very cheap from a valuation perspective.

Are they worth buying today? Let’s discuss.

Three reasons to be bullish

There are certainly reasons to be bullish on Shell right now, to my mind. For starters, the company is going to be a major beneficiary of higher oil prices.

In September, the price of Brent crude oil rose as high as $95 per barrel on the back of supply concerns (Saudi Arabia and Russia announced they will be extending production cuts until the end of the year).

At that oil price, Shell is going to be minting money. That’s because the company’s breakeven price is somewhere around the $30-$40 a barrel mark.

It’s worth noting that many energy analysts expect oil prices to keep rising. Recently, analysts at Goldman Sachs raised their Brent oil price target to $100 from $93. Meanwhile, analysts at JP Morgan believe that Brent could hit $150 per barrel by 2026. They believe oil is in a ‘supercycle’ driven by low capital expenditure and supply shocks.

Another thing Shell has going for it is that dividends are rising rapidly. For 2023, analysts expect the oil major to pay out $1.38 a share in dividends to investors. That would represent a year-on-year increase of 33%. The company is also buying back shares right now. This could help increase earnings per share.

Finally, as I mentioned, the company’s valuation is low. At present, Shell shares sport a forward-looking price-to-earnings (P/E) ratio of around 7.6. To put that figure in context, the median P/E ratio across the FTSE 100 index is about 13. So the shares are trading at a significant discount to the broader market.

Risks to consider

There are a few risks to consider here though. One is the unpredictable nature of oil prices. Sure, prices are high now, but there’s no guarantee they will stay high (the global shift towards renewable energy adds some uncertainty here). So it’s hard to forecast Shell’s future revenues and earnings.

There are also some question marks over the group’s long-term strategy. In 2021, Shell said it would gradually cut oil production over the next decade and focus more on renewables.

However, in June, CEO Wael Sawan – who took the top job in January – outlined plans to slow investment in renewables and low-carbon business in an effort to boost returns. This has resulted in a bit of a backlash, with several employees recently writing to the CEO in an open letter urging him to stay focused on clean energy.

It’s worth noting that this is not the first time Shell has attracted attention for its lack of focus on clean energy.

My view

Weighing everything up, I do think Shell shares look quite interesting right now. However, there are a few other UK shares I’d buy before investing in the oil giant.