Forward of Q3 earnings, is the Shell share value a discount?

Over the past 12 months, the Shell (LSE:SHEL) share value has fallen round 7%. And the corporate is about to report its earnings for the third quarter of 2024. 

It seems to be doubtless that earnings are going to come back in decrease than they did a yr in the past. However with the inventory already down, is the unhealthy information priced in?

A troublesome setup

There are two causes Shell’s earnings are anticipated to be weaker than they have been in 2023. One is that issues have been exceptionally sturdy then and the opposite is that they’re harder now. 

Earlier this week, BP reported its lowest quarterly revenue since 2020. And the corporate recognized weaker refining margins as a key cause for this. 

Gasoline & diesel refining margins Q3 2023-present

It’s completely true that diesel and gasoline margins are decrease than they have been a yr in the past – and this is similar for Shell as it’s for BP. However decrease refining differentials aren’t the one challenge.

BP additionally said its buying and selling revenues had normalised after an unusually sturdy Q3 2023. Shell additionally reported a formidable efficiency in its buying and selling a yr in the past, in order that’s additionally prone to be decrease.

Outlook 

These elements imply I’m not anticipating a lot in the best way of constructive surprises from Shell when it reviews earnings on Thursday (31 October). However the greater challenge for the buyers is the long run.

By way of refining margins, the outlook is considerably combined. Whereas the gasoline differential is roughly the place it was a yr in the past, the unfold on diesel remains to be a lot decrease. 

Consequently, I’m anticipating weak spot in refining margins to proceed into This autumn of this yr. And the outlook for oil costs extra broadly can also be difficult within the close to time period. 

The availability aspect of the equation seems to be sturdy, whereas the demand aspect seems to be weak. In the end, meaning costs are unlikely to rise till one thing modifications. 

A shopping for alternative?

All of this implies there’s not lots of trigger for optimism round Shell – and oil firms on the whole. However generally, the perfect time to purchase might be when everybody else is wanting elsewhere. 

With Shell particularly, I’m not fairly certain that is the second, although. A take a look at the place the inventory has been buying and selling by way of its price-to-book (P/B) ratio during the last 10 years is fascinating.

Shell P/B ratio 2015-24

Created at TradingView

The present share value implies a P/B a number of of 1.15, which is roughly in the midst of the historic vary. To me, that doesn’t say buyers are significantly frightened proper now.

Given this, I’m inclined to assume the market is likely to be wanting previous the corporate’s short-term points. And whereas that’s commendable, it doesn’t actually make for a shopping for alternative.

Maintain watching

I don’t have big expectations for Shell forward of the corporate’s Q3 earnings. The enterprise is going through a way more troublesome set of buying and selling situations than it was final yr. 

I really assume that is prone to proceed, however I’m not satisfied the present share value displays this. So I’m going to maintain this one on the watchlist and look elsewhere for alternatives.