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== Valuation == The following is an absolute valuation of Shell plc, by using a 10 year discounted cash flow (DCF) model. {| class="wikitable" |+Financials<ref>Shell annual report 2022 (pg. 241-244) - https://reports.shell.com/annual-report/2022/_assets/downloads/shell-annual-report-2022.pdf Shell annual report 2019 (pg. 195-198) - https://reports.shell.com/annual-report/2019/servicepages/downloads/files/shell_annual_report_2019.pdf</ref> ! '''Units ($m)''' !'''2017''' !'''2018''' !'''2019''' !'''2020''' !'''2021''' !'''2022''' |- |Total Revenue | 305,179.00 | 388,379.00 | 344,877.00 | 180,543.00 | 261,504.00 | 381,314.00 |- |% Growth | |27.3% | -11.2% | -47.7% |44.8% |45.8% |- |Purchases | - 223,447.00 | - 294,399.00 | - 252,983.00 | - 117,093.00 | - 174,912.00 | - 258,488.00 |- |Production and Manufacturing Expenses | - 26,652.00 | - 26,970.00 | - 26,438.00 | - 24,001.00 | - 23,822.00 | - 25,518.00 |- |Selling, Distribution and Admin Expenses | - 10,509.00 | - 11,360.00 | - 10,493.00 | - 9,881.00 | - 11,328.00 | - 12,883.00 |- |R&D Expenses | - 922.00 | - 986.00 | - 962.00 | - 907.00 | - 815.00 | - 1,075.00 |- |Exploration Expenses | - 1,945.00 | - 1,340.00 | - 2,354.00 | - 1,747.00 | - 1,423.00 | - 1,712.00 |- | '''EBIT''' | ''' 41,704.00''' | ''' 53,324.00''' | ''' 51,647.00''' | ''' 26,914.00''' | ''' 49,204.00''' | ''' 81,638.00''' |- |Depreciation & Amortisation | 26,223.00 | 22,135.00 | 28,701.00 | 52,444.00 | 26,921.00 | 18,529.00 |- |CapEx | - 20,845.00 | - 23,011.00 | - 22,971.00 | - 16,585.00 | - 19,000.00 | - 22,600.00 |- |Current Assets | 95,404.00 | 97,482.00 | 92,689.00 | 90,695.00 | 128,765.00 | 165,938.00 |- |Cash | 20,312.00 | 26,741.00 | 18,055.00 | 31,830.00 | 36,970.00 | 40,246.00 |- |Current Liabilities | 77,813.00 | 79,767.00 | 79,624.00 | 73,951.00 | 94,294.00 | 119,916.00 |- |Net Change in Working Capital | - 2,721.00 | - 9,026.00 | - 4,990.00 | - 15,086.00 | - 2,499.00 | 5,776.00 |- |Net Change in Working Capital (increasing/decreasing) | | 6,305.00 | - 4,036.00 | 10,096.00 | - 12,587.00 | - 8,275.00 |- ! colspan="7" |Other information |- |Growth | - |27.3% | -11.2% | -47.7% |44.8% |45.8% |- |Purchases % of revenue |73.2% |75.8% |73.4% |64.9% |66.9% |67.8% |- |P&M Expenses % of revenue |8.7% |6.9% |7.7% |13.3% |9.1% |6.7% |- |SD&A Expenses % of revenue |3.4% |2.9% |3.0% |5.5% |4.3% |3.4% |- |R&D Expenses % of revenue |0.3% |0.3% |0.3% |0.5% |0.3% |0.3% |- |Exploration Expenses % of revenue |0.6% |0.3% |0.7% |1.0% |0.5% |0.4% |- |Depreciation % of revenue |8.6% |5.7% |8.3% |29.0% |10.3% |4.9% |- |CapEx % of revenue |6.8% |5.9% |6.7% |9.2% |7.3% |5.9% |- |Assets % of revenue |31.3% |25.1% |26.9% |50.2% |49.2% |43.5% |- |Cash % of revenue |6.7% |6.9% |5.2% |17.6% |14.1% |10.6% |- |Liabilities % of revenue |25.5% |20.5% |23.1% |41.0% |36.1% |31.4% |} {| class="wikitable" |+Model Assumptions ! !'''2023''' !'''2024''' !'''2025''' !'''2026''' !'''2027''' !'''2028''' !'''2029''' !'''2030''' !'''2031''' !'''2032''' !'''Explanations''' |- |Growth |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |'''1''' |- | Purchases % of revenue |66.7% |65.6% |64.5% |63.4% |62.3% |61.2% |60.1% |59.0% |57.9% |56.8% |'''2''' |- | P&M Expenses % of revenue |6.3% |5.9% |5.5% |5.1% |4.6% |4.2% |3.8% |3.4% |3.0% |2.6% |'''3''' |- | SD&A Expenses % of revenue |3.8% |3.8% |3.8% |3.8% |3.8% |3.8% |3.8% |3.8% |3.8% |3.8% |'''4''' |- | R&D Expenses % of revenue |0.3% |0.3% |0.3% |0.3% |0.3% |0.3% |0.3% |0.3% |0.3% |0.3% |'''5''' |- | Exploration Expenses % of revenue |0.4% |0.4% |0.3% |0.3% |0.2% |0.2% |0.2% |0.1% |0.1% |0.0% |'''6''' |- | Depreciation % of revenue |4.1% |3.4% |2.6% |1.9% |1.1% |0.4% | -0.4% | -1.1% | -1.9% | -2.6% |'''7''' |- | CapEx % of revenue |6.5% |6.5% |6.5% |6.5% |6.5% |6.5% |6.5% |6.5% |6.5% |6.5% |'''8''' |- | Assets % of revenue |45.5% |47.5% |49.5% |51.5% |53.5% |55.5% |57.5% |59.5% |61.5% |63.5% |'''9''' |- | Cash % of revenue |11.2% |11.8% |12.4% |13.0% |13.6% |14.2% |14.8% |15.4% |16.0% |16.6% |'''10''' |- | Liabilities % of revenue |32.4% |33.4% |34.4% |35.4% |36.4% |37.4% |38.4% |39.4% |40.4% |41.4% |'''11''' |} '''1''' - Average revenue growth is 4.2% per year from 2017 to 2022. The same revenue growth is forecast. '''2''' - Average decrease in purchasing expenses is 1.1% per year from 2017 to 2022, the same decrease in purchasing is forecast. '''3''' - Average decrease in production and manufacturing expenses is 0.41% per year from 2017 to 2022, the same decrease is forecast. '''4''' - Average selling, distribution and admin expense is 3.8% per year from 2017 to 2022, this average is forecast. '''5''' - Average research and development expense is 0.3% per year from 2017 to 2022, this average is forecast. '''6''' - Average decrease in exploration expenses is 0.04% per year from 2017 to 2022, the same decrease is forecast. '''7''' - Average decrease in depreciation and amortisation is 0.75% per year from 2017 to 2022, the same decrease is forecast. '''8''' - Average CapEx is 6.5% per year from 2017 to 2022, this average is forecast. '''9''' - Average asset growth is 2% per year from 2017 to 2022, the same increase is forecast. '''10''' - Average cash growth is 0.6% per year from 2017 to 2022, the same increase is forecast. '''11''' - Average liabilities increase is 1% per year from 2017 to 2022, the same increase is forecast. {| class="wikitable" |+WACC Calculation (units $ m) |Risk Free Rate of Return |4.4%<ref>UK 10 Year Gilt Yield - https://markets.ft.com/data/bonds/tearsheet/summary?s=UK10YG</ref> |- |Beta |1.21<ref>https://markets.ft.com/data/equities/tearsheet/summary?s=SHEL:LSE</ref> |- |Market Rate of Return |7.4%<ref>FTSE 100 rate of return (1984-2022), total annualised return - https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--230511</ref> |- | '''Cost of Equity''' |'''8.0%''' |- |Credit Spread |0.85%<ref>https://www.shell.com/investors/debt-information/credit-ratings.html</ref> |- | '''Cost of Debt''' |'''3.5%''' |- |Shares Outstanding |7,345.31<ref name=":1">Shell annual report 2022 (pg.241) - https://reports.shell.com/annual-report/2022/_assets/downloads/shell-annual-report-2022.pdf</ref> |- |Share Price |30.28<ref>Share price in USD as of 04/07/2023.</ref> |- | '''Equity''' | '''222,416.06''' |- |Short Term Debt |9,044.4 |- |Long Term Debt |76,098.00 |- |Cash and Cash Equivalents |42,074.00 |- | '''Debt''' | '''43,068.00''' |- |E/D+E |83.8% |- |D/D+E |16.2% |- | '''WACC''' |'''7.1%''' |} {| class="wikitable" |+Forecast Financials ! '''Units ($m)''' !'''2023''' !'''2024''' !'''2025''' !'''2026''' !'''2027''' !'''2028''' !'''2029''' !'''2030''' !'''2031''' !'''2032''' |- |Total Revenue | 397,168.82 | 413,682.87 | 430,883.56 | 448,799.45 | 467,460.27 | 486,897.00 | 507,141.90 | 528,228.56 |550,192.00 |573,068.67 |- |% Growth |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |4.2% |- |Purchases | -264,866.92 | -271,329.43 | -277,871.43 | -284,488.37 | -291,175.17 | -297,926.20 | -304,735.23 | -311,595.44 | -318,499.28 | -325,438.54 |- |P&M Expenses | - 24,950.63 | - 24,291.96 | - 23,535.39 | - 22,673.90 | - 21,700.08 | - 20,606.08 | - 19,383.58 | - 18,023.81 | -16,517.44 | - 14,854.64 |- |SD&A Expenses | - 14,956.35 | - 15,578.22 | - 16,225.96 | - 16,900.62 | - 17,603.34 | - 18,335.28 | - 19,097.65 | - 19,891.72 | - 20,718.80 | - 21,580.28 |- |R&D Expenses | - 1,191.51 | - 1,241.05 | -1,292.65 | -1,346.40 | -1,402.38 | -1,460.69 | -1,521.43 | -1,584.69 | -1,650.58 | -1,719.21 |- |Exploration Expenses | - 1,624.32 | -1,526.38 | - 1,417.49 | - 1,296.91 | - 1,163.85 | -1,017.49 | - 856.94 | - 681.28 | - 489.53 | - 280.65 |- | '''EBIT''' | ''' 89,579.09''' | ''' 99,715.82''' |''' 110,540.64''' |''' 122,093.25''' |''' 134,415.45''' |''' 147,551.27''' |''' 161,547.07''' |''' 176,451.64''' | ''' 192,316.38''' | ''' 209,195.34''' |- | '''Tax Rate''' <ref name=":1" /> |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |'''34.0%''' |- |Depreciation & Amortisation | 16,320.66 | 13,896.64 | 11,242.83 | 8,344.30 | 5,185.30 | 1,749.18 | -1,981.66 | - 6,025.77 | -10,402.76 | - 15,133.31 |- |CapEx | - 25,815.97 | - 26,889.39 | - 28,007.43 | - 29,171.96 | - 30,384.92 | - 31,648.31 | - 32,964.22 | - 34,334.86 | - 35,762.48 | - 37,249.46 |- |Current Assets | 180,780.98 | 196,571.41 | 213,362.41 | 231,209.88 | 250,172.66 | 270,312.63 | 291,694.92 | 314,387.99 | 338,463.90 | 363,998.41 |- |Cash | 44,302.42 | 48,626.58 | 53,233.75 | 58,139.98 | 63,362.16 | 68,918.11 | 74,826.54 | 81,107.15 | 87,780.69 | 94,868.97 |- |Current Liabilities | 128,873.73 | 138,369.05 | 148,431.19 | 159,090.87 | 170,380.38 | 182,333.67 | 194,986.41 | 208,376.12 | 222,542.20 | 237,526.06 |- |NCWC | 7,604.84 | 9,575.77 | 11,697.46 | 13,979.04 | 16,430.12 | 19,060.86 | 21,881.97 | 24,904.72 | 28,141.01 | 31,603.37 |- |NCWC (inc/dec) | - 1,828.84 | - 1,970.94 | - 2,121.69 | - 2,281.57 | - 2,451.08 | - 2,630.74 | - 2,821.11 | - 3,022.75 | - 3,236.29 | - 3,462.36 |- | '''FCF''' | ''' 47,798.05''' | ''' 50,848.76''' | ''' 54,070.53''' | ''' 57,472.31''' | ''' 61,063.50''' | ''' 64,853.97''' | ''' 68,854.08''' | ''' 73,074.71''' | ''' 77,527.28''' | ''' 82,223.79''' |- |Growth Rate | | | | | | | | | |0% |- | '''Terminal Value''' | | | | | | | | | |''' 1,158,697.87''' |- |Discount Factor |0.96703846 |0.90296224 |0.84313173 |0.7872656 |0.73510118 |0.68639318 |0.64091259 |0.59844556 |0.5587924 |0.521766671 |- |'''Present Value of FCF''' | ''' 46,222.55''' | ''' 45,914.51''' | ''' 45,588.58''' | ''' 45,245.97''' | ''' 44,887.85''' | ''' 44,515.32''' | ''' 44,129.44''' | ''' 43,731.23''' | ''' 43,321.66''' | ''' 42,901.63''' |- |'''Present Value of Terminal Value''' | | | | | | | | | | ''' 604,569.93''' |- |'''Enterprise Value''' | | | | | | | | | |''' 1,051,028.68''' |- |'''Equity Value''' | | | | | | | | | |''' 1,050,034.68''' |- |'''Share Price''' | | | | | | | | | | '''$ 142.95''' |} The DCF valuation shows that Shell stock is undervalued, based on yearly revenue growth of 4.2%, and a terminal growth rate of 0%. The model reflects Shell managements targets of 6% free cash flow growth per year, as well as expected revenue of $4-5 billion in 2025. '''Shell Targets''' At the latest Shell capital markets day on the 14/06/2023, Shell CEO Wael Sawan announced that a minimum of $5 billion in share buy-backs would take place in the second half of the year, a strong sign that Shell management believes that their company is undervalued. The company aims to grow free cash flow by a minimum rate of 6% per year through to 2030. Furthermore, it was announced that Shell would sustain their production of oil at 1.4 million barrels per day throughout the decade, as well as growing their integrated gas portfolio through an extra 11 million tons of storage per year, which will come into effect past 2025. For context this value is 1/3 of Shell's current LNG capacity. Alongside this, Shell has set strict targets of reducing structural cost by $2-3 billion by the end of 2025, as well as a capital spend reduction to a total of $22-25 billion per year for 2024/2025. Shell will have a break even price of $30 per barrel on projects coming online between 2023-2025, well below the forecast crude oil prices. '''ESG Factors''' Liquefied Natural Gas (LNG) makes up a majority of Shell's gas portfolio, although a non-renewable source of energy, it produces 50% less carbon emissions than coal when used to produce electricity. Shell aims to phase out coal, and replace it with the lower carbon alternative, LNG. Shell also has targets to have net zero methane emissions by 2030, and to eliminate routine flaring by 2025, faster than the world bank's 2030 deadline. Shell decreased carbon emissions by 30% during the period 2016-2022, in contrast, global carbon emissions increased by 4%. Shell has made strong progress on it's aims to be carbon neutral by 2050, including announcing up to $15 billion in low carbon investments, such as $1 billion a year in carbon capture and storage in 2024-2025. '''Relative Valuation''' # By Stock Analysis, Shell plc (NYSE: SHEL) has a '''market cap''' of $207.49 billion and an '''enterprise value''' of $251.22 billion. The stock's '''trailing PE ratio''' is 5.12, and the '''forward PE ratio''' is 5.31. Shell plc has a '''return on equity''' of 23.30%, the '''operating margin''' for Shell plc is 17.61%. # From report by Fidelity, The market cap for Shell is $200.53 billion, with an enterprise value of $243.60 billion. The trailing P/E ratio is 5.05, and the forward P/E ratio is 6.72. # Under the Base Case scenario, the relative value of one Shell plc stock is $257.89, indicating that Shell is undervalued by 76% compared to the current market price. # According to Simply Wall St, Shell plc is currently priced below fair value and significantly below fair value. The enterprise value/revenue ratio is 0.6x, the enterprise value/EBITDA ratio is 3.1x, and the PEG ratio is -0.3x. # Under the base case scenario, the relative value of one Shell PLC stock is 9,972.64 GBX. Compared to the current market price of 2,352 GBX, Shell PLC is undervalued by 76%. Based on these sources, it appears that Shell plc is considered undervalued in relative valuation compared to the current market price. Utilising comparable approaches to those employed for Shell's valuation, we've performed a relative valuation analysis between ExxonMobil Corporation (XOM) and Shell plc. Here are our findings: '''Market Capitalization and Enterprise Value:''' Shell plc's market capitalization oscillates between $200.53 billion and $207.49 billion, with its enterprise value varying between $243.60 billion and $251.22 billion. In comparison, Exxon Mobil commands a solid market cap of $428.44 billion and an enterprise value of $437.23 billion. '''Trailing and Forward Price-to-Earnings (P/E) Ratios:''' Shell plc's trailing P/E ratio fluctuates between 5.05 and 5.12, with a forward P/E ratio between 5.31 and 6.72. Meanwhile, Exxon Mobil displays a trailing P/E ratio of 7.17 and a forward P/E ratio of 10.93. '''Return on Equity (ROE) and Operating Margin:''' Shell plc boasts a ROE of 23.30% and an operating margin of 17.61%. Unfortunately, corresponding data for Exxon Mobil is not available. In the US market, Exxon Mobil's valuation is approximately six times its cash flow, a stark contrast to Shell's, which is valued about three times its cash flow. Our analysis suggests that ExxonMobil is undervalued by around 2%, a value significantly lower than Shell's undervaluation. This implies that, compared to its competitors, Shell may be undervalued. This finding is consistent with the results of our Discounted Cash Flow (DCF) analysis.
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