AI And Robotics Adoption Will Improve Long-Term Operational Performance

Key Takeaways

• New technologies enhancing safety and efficiency may lead to improved long-term performance and higher net margins.
  
• Cost reductions and capital discipline are likely to increase shareholder returns and optimize free cash flow growth.
  
• Shell faces revenue uncertainty due to LNG market volatility, execution risks, regulatory challenges, and loss-making renewable investments, impacting projected financial targets.

Catalysts

Operates as an energy and petrochemical company Europe, Asia, Oceania, Africa, the United States, and Rest of the Americas.

• Shell's use of new technologies, such as sensors, robotics, and AI, to enhance process safety and operational efficiency is expected to improve long-term operational performance and potentially lead to higher net margins.
  
• The company is ahead of its schedule to reduce structural costs, having achieved $3.1 billion in reductions by the end of 2024. This cost discipline is likely to enhance net margins and earnings growth.
  
• Shell's commitment to capital discipline, as seen with the intentional reduction in CapEx and selective project investments, aims to optimize capital efficiency. This is expected to support free cash flow growth and shareholder returns.
  
• The expansion of integrated gas and upstream production capabilities, with significant new projects coming online, is projected to increase production volumes and drive revenue growth in the coming years.
  
• Shell's strategic shift towards high-margin activities, increased shareholder distributions, and focus on buybacks signal confidence in the underpricing of its shares, potentially leading to higher earnings per share (EPS) as buybacks continue to be prioritized.

Shell Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shell's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $21.8 billion (and earnings per share of $4.27) by about April 2028, up from $16.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $26.9 billion in earnings, and the most bearish expecting $17.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 13.5x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 9.1x.
• Analysts expect the number of shares outstanding to decline by 6.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

Shell Future Earnings Per Share Growth

Risks

• The volatility in LNG and natural gas markets, particularly in regions like Canada, could create uncertainty around predictable pricing and reserves, potentially affecting Shell's revenue and ability to secure favorable contracts.
  
• Delays in finalizing major projects, such as the Pavilion deal and potential expansions like LNG Canada Phase 2, might hinder future earnings growth and emphasize execution risks, impacting Shell’s capacity to meet its projected financial targets.
  
• The strategic shift towards reducing carbon emissions and investing in renewables and energy solutions, while imperative, is currently loss-making and may not realize profit in the near term, pressuring net margins and overall financial performance.
  
• Regulatory and geopolitical uncertainties, such as those in Nigeria or the evolving LNG landscape, could impact capital allocation and result in unexpected costs or project delays, affecting the company's earnings projections.
  
• The competitive and volatile nature of the chemicals market, exemplified by decisions like the expansion in China, means that Shell faces ongoing risks related to project execution and demand dynamics, potentially impacting revenue and net cash flow.

Valuation

• The analysts have a consensus price target of £32.957 for Shell based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £39.97, and the most bearish reporting a price target of just £28.91.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $284.8 billion, earnings will come to $21.8 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 8.5%.
• Given the current share price of £27.8, the analyst price target of £32.96 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.