Shell’s (LSE: SHEL) share price has dipped from its 31 March one-year traded high of £35.91. This adds to the already sizeable discount at which it trades to its true worth (‘fair value’), in my view.
The disconnect is even more striking, given the energy giant’s huge free‑cash‑flow generation, disciplined capital spending and ongoing share buybacks that steadily lift per‑share value.
So, what sort of gains could investors be looking at here?
How wide is the valuation gap?
The massive gap between Shell’s price and its fair value is not unusual in the stock market. The two measures often diverge, as they are driven by very different factors.
The price of a share is simply the outcome of short-term trading — the level at which market participants are willing to deal. But its value is rooted in the fundamentals of the business behind it.
For savvy, long-term investors, that gap is crucial. History shows that prices usually gravitate towards fair value over time, making the difference between the two an important driver of long-term gains.
Professional investors often rely on discounted cash flow (DCF) analysis to cut through the market noise and estimate what a stock is genuinely worth. The method projects future cash flows and discounts them back to today. The less certain those projections, the higher the discount applied to them.
Because analysts use different assumptions, their DCF valuations naturally diverge. Using my own inputs, including a 7.2% discount rate, Shell looks 63% undervalued at its current £33.14 price.
That places fair value around £89.57 — more than twice the current level.
Consequently, if markets continue drifting toward fair value, this could be an exceptional opportunity if those DCF assumptions prove correct.
How does growth momentum look?
The key catalyst to move price to fair value over time is sustained earnings growth. A risk for Shell is any sharp downturn in oil and liquefied natural gas (LNG) prices. It could quickly feed through to lower cash generation and slower earnings momentum. Another would be any substantial rise in capital‑investment demands for its energy transition businesses. This might squeeze free cash flow and delay the pace of per‑share value growth.
Nonetheless, analysts forecast Shell’s earnings will increase by an average of 6.4% a year to end‑2028, at a minimum. Its latest (Q4 2025) results showed adjusted earnings of $3.3bn (£2.4bn), supported by strong operational performance in Upstream and Integrated Gas in a lower‑price environment.
Cash flow from operations came in at a strong $9.4bn, reflecting resilient cash generation across the portfolio. Full‑year free cash flow of $26.1bn continued to fund dividends and buybacks while maintaining a robust balance sheet. This highlighted the benefits of Shell’s $5.1bn structural cost‑reduction programme and disciplined capital allocation.
Together, I think these elements should continue to support solid earnings growth ahead.
My investment view
Shell stands out as a stock that combines deep undervaluation with clear, ongoing drivers of long‑term value creation. These are strong cash generation, disciplined capital spending and meaningful cost efficiencies, which give investors a solid foundation for potential gains.
For long‑term investors willing to look past short‑term volatility, Shell’s current valuation makes it a worthy candidate for serious consideration.
And I will certainly be adding to my existing holding at the earliest opportunity.
The post Down 8%, is Shell’s share price a steal now around £33? appeared first on The Motley Fool UK.
Should you invest £1,000 in Shell Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Shell Plc made the list?
More reading
- How should FTSE 100 energy investors react to the UAE quitting Opec?
- A £20,000 ISA invested in red-hot BP and Shell shares 1 year ago is now worth…
- Up 36%, could Shell shares still offer value for the long term?
- Does the Iran war spell long-term disaster for BP and Shell shares?
- 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
Simon Watkins has positions in Shell Plc. 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.
0 Comments