SIF Folio: Value Rotation Continues With Shell

16th Feb '22 by Roland Head

13 comments 2605 reads

My decision to add British American Tobacco (LON:BATS) to SIF last week generated an unprecedented number of comments on ethical issues. Given this strength of feeling among subscribers, I thought I should clarify the process I use to select stocks for SIF.

SIF (Stock in Focus) is a rules-based model portfolio I’ve run here at Stockopedia since 2016. I use a screen to select shares to add to the portfolio, with a manual overlay of diversification. My screening criteria are purely financial, targeting a mix of affordable growth, quality and momentum.

At present there is no ESG component to this strategy. Even if I wished to, I could not rule out individual sectors on ethical grounds without breaking the rules of my system.

My personal view is that we’re currently seeing a rotation from highly-rated ESG/tech stocks into value shares. BAT scores highly on traditional value metrics despite its ethical baggage. I think that this week’s stock - the recently renamed Shell (LON:SHEL) - has a similar profile.

Shell (LON:SHEL) is back on top

I have not contrived to choose Shell to follow on from BAT. What’s happened is that Shell’s bumper financial results last week have lifted the company to the top of my screening results. Rival BP makes the screen for similar reasons, albeit lower down the list:

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Like tobacco, the oil industry attracts justified criticism for its efforts to suppress science through marketing and legislative capture. Even so, Shell is the largest company in the FTSE 100. The products it produces are part of the fabric of life for all of us. Like it or not, I think we may need to rely on the infrastructure and resources of companies like this to help us navigate the energy transition.

Of course, that transition isn’t really happening yet. Instead, Shell and its peers are delivering near-record profits from fossil fuels, thanks to high energy prices and newly-optimised production portfolios.

Last week’s results were on an epic scale. Shell’s free cash flow hit $40bn in 2021, or $27bn excluding asset sales. Net debt fell by $23bn. Adjusted net earnings quadrupled to $19.3bn. An $8.5bn share buyback is underway. Even the dividend received a blockbuster 37% increase (although the payout remains less than half pre-pandemic levels).

After a tough start…

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aflash

16th Feb '22

I.C. says Sell.

I.C. may mean Investors' Chronicle but some invert the letters to make Contrarian Indicator.

Everybody holds this stock, even if not directly. Pensions, trackers, dividend funds.

Zipmanpeter

Very similar to my own assessment - except I have taken the opposite decision, using the I suspect temporarily high share price to reduce my position size by about half (to a still chunky 5%). Probably there are a few more months of high prices but then......more gas from anywhere that can make, another nudge towards renewables powered electricity. It certainly seems unlikely that Shell can double for very long ie upside is limited

I quite like that Shell seem to be staying ahead of theenergy transition by selling out of weak assets and building up electricicity / trading services but I doubt this is will leave such a big company in 10 years time.

At the same, there seem to be better options elsewhere in the market. But good luck, I have been very wrong before!

WarrantStar

Thank you for a very well balanced article. Personally, I never invest in commodity businesses because it is impossible to predict the price that they will be able to sell their product for. It's also a cyclical business. Who knows what will happen to the economic cycle? Although many claim to know, they are at best making an educated guess. However, both these factors, and also the ESG factors, have to be weighed up against the fact that the shares are currently cheap with a value rank of 82. But, if Putin decides to take his tanks home, and a whole host of other factors cause energy prices to fall significantly from their present high levels, then the current price of Shell shares would be looking rather expensive. It's all far too unpredictable for me.

Will Marsh

Good article. Personally, I think we could see another 10-15% at least out of shell. What I think is not considered here is that Shell is relatively well priced in a generally overvalued market. Also, as such a big company the share is relatively a safe haven for money in tumultuous times. Whilst it's not popular in these ESG times the shares fundamentals speak volumes

ACounsell

Hi Roland,

Think you are being a little unfair in suggesting that Shell (LON:SHEL), and I guess by implication Bp (LON:BP.) too, are not addressing climate change and the need to shift to renewables. Yes they are be benefiting hugely from the high current prices of oil & gas and as a consequence their Stocko & your SIF metrics look very positive. The cynics and the green community might say they would say that wouldn’t they but if you look at the Strategy update from Bp (LON:BP.) last week you will see that they recognise a transition has to happen and they intend to be a big part of it. I expect Shell (LON:SHEL) will go down the same path. I’m not a great fan of ESG and think there is a lot of ‘throwing the baby out with the bath water’. The future revenues & profitability of these big oil companies may not be tied so closely to fossil fuel in the future. Add to that the fact that during any transition we still need oil & gas in virtually all areas of our economy and that cannot change overnight. I am more than happy to hold Bp (LON:BP.) & £SHEL for the excellent short term dividend yield and their longer term role in the energy transition.

However, not for ESG reasons but because their product is addictive and kills people I would never invest in British American Tobacco (LON:BATS) but that is a personnel decision rather than one based on rational analysis!

Bouden54

I think Shell still looks very cheap. Trailing PE may be around 11, but at current oil prices PE is more like 7. Worth noting that share price is still well below its pre Covid level. As well as being cheap, also provides an very good inflation hedge.

Pentago

I think there are some interesting responses here. I loved that aflash believes everyone owns this stock, when it has underperformed the market (since the Covid plunge), and ESG has been the key thematic - I would disagree, I think that many PMs have done well out of avoiding the oils and have been scrambling back in. I do however agree that this is not a doubler - but with 3-4% yield, and great cashflow does it need to be? I agree with the many of the replies - the European oil majors are critical players and can be beneficiaries in the great energy transition, and should not be excluded by ill-informed ESG hardliners. What is most important to understand though is the total lack of accessible spare production capacity worldwide, as is finally being understood by the International Energy Agency - the key concern for all investors should be that rising energy prices will likely push us into the next recession. Oil, Copper and Gold should be part of your portfolio here.

Bronstein

I note the comments about short term rise in earnings arising from the spike in oil and gas prices. However, I see BP & Shell as a long term play as well. Energy consumption is not going to go down and it's likely that the same companies producing electricity from oil and gas today will be the ones producing it in more ESG friendly ways in future. Just look at who is snapping up the licenses for off shore windfarms at present.

JohnEustace

duplicate

Doug2b

I don't smoke and I can't imagine I would buy tobacco stocks, even if I felt that the investment case was good.

But how do I feel about an investing writer assessing tocacco stocks? I have no issue here, while I would prefer not to buy tobacco stocks, that is my choice, if other investors feel happy to buy them, then that is their choice and I would not criticise them for doing so. And no, I don't feel uneasy about Roland covering tobacco stocks. At the end of the day, tobacco is not forced upon people, they have a choice and that is the key point here I think.

G Morris

Big oil hasn't had it's day yet. Surprised to read recently that Japan and South Korea, two of the most advanced countries, how reliant they are for carbon energy, including coal. Maybe wind dosn't blow so much in that part of the World

Harry Hindsight

17th Feb '22

Thanks again for reminding us of what the Stocko metrics mean. Sometimes its right in front of your face and you chose to ignore it.

HHShah

Excellent analysis which can be used as a template for my own analysis. Just one question - you mention Earnings Yield (EBIT/EV) of 11.3. Where is that ratio shown on the Stock report?

SIF Folio: value rotation continues with Shell

Shell (LON:SHEL) is back on top

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Roland Head

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