Already this year, the Shell (LSE: SHEL) share price has surged 26%. It’s even more impressive over one year as the stock has rallied a huge 59%. As it stands, the company is the most valuable member of the prestigious FTSE 100 index.
Let’s take a look to see if there’s further room for the share price to run.
Why has the Shell share price surged?
Shell is a large integrated oil and gas company. In fact, the Oil Products division accounted for 70% of its total revenue last year. Revenue and profit growth were excellent for 2021 too, at 45% and 623%, respectively. However, these growth rates reflect a much reduced level of revenue and profit during 2020 due to the impacts from the pandemic.
Indeed, the price of oil crashed at the onset of the pandemic as demand for the fuel plummeted. Consumers were no longer going on holidays which reduced oil demand from airlines. And even domestic travel largely stopped due to lockdowns so vehicles weren’t being used. The result was a crash in the price of crude oil, which reached a low of close to $22.50 a barrel in March 2020.
However, since the price crash, crude oil has rallied to an eight-year high. As Shell still generates a majority of its sales from crude oil, the company’s share price has surged along with the oil price.
The risks ahead
There will be continued volatility in Shell’s profits for as long as it derives most of its revenue from crude oil. Commodity markets are known to be volatile. As such, I’d have to be comfortable with this risk if I bought the shares today.
Then there’s the environmental factor and global efforts to decarbonise our economies. Therefore, Shell’s primary product is operating in a structurally declining sector due to the rise of renewable energy sources.
Should I buy Shell shares?
I previously wrote about Shell back in December. The share price has rallied 25% since I considered the stock a buy for my portfolio so I should have bought it at the time. The forward dividend yield has dropped to 3.5% now though. I’d want this to be higher if I decided to buy the shares in my portfolio today. Furthermore, the crude oil price has continued to rally, and I don’t expect this to keep rising indefinitely. Any fall in its price, and Shell’s profitability will likely suffer.
However, one final point to note is that activist investor group Third Point has built a stake in the firm. It sees potential for the company to be split up into a legacy oil business, and other separate businesses focused on clean energy. Triple Point says this will unlock hidden value in Shell that the market doesn’t currently recognise.
I agree with Triple Point. Shell is investing heavily in renewable energy solutions, which I think is often overlooked due to its dominant oil and gas operations. Nevertheless, there’s no guarantee that Triple Point will succeed in any restructuring aims. So for now, I’m putting Shell back on my watchlist.
Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
