Today we are moving shares of long-recommended Shell plc (SHEL) from Buy to Sell. Our call is part of our effort to reduce the number of names on our recommended list to focus only on the most attractive turnarounds.
Shell is well-positioned in the global energy industry and currently generates impressive free cash flow. The company is returning much of this free cash flow to shareholders, through dividends and share buybacks, following a substantial reduction in its debt burden. However, Shell’s incoming leadership is likely to remain committed to heavily investing in new sources of energy, including wind, hydrogen and a broad range of renewables as well as carbon capture and other climate-friendly programs. Its new initiatives will likely be driven by both internal investments and acquisitions/partnerships.
The company may be successful in generating attractive returns from its transition to new energy sources and would clearly benefit from increases in oil and natural gas prices. But, even as the valuation is underwhelming, we find that the shares’ risk/return trade-off is not favorable enough to justify holding the position. In essence, it is not a turnaround worthy of new money.
Shell has been on our recommended list since January 2015, and it is time to exit. Since our initial recommendation, the shares have generated approximately a 14% total return.
