Is Shell (LSE:SHEL) one of the best UK stocks to buy right now? There’s a good case for thinking it belongs in the conversation.
The stock market sees it as an oil company. But its main product is natural gas – and that’s where the investment thesis begins…
Natural gas
Over half of what Shell produces is natural gas. And the supply and demand economics for its products look pretty good right now.
The stock market has been fascinated by data centres recently. But one of the things it’s noticed is that they’re very energy-intensive. Renewables and nuclear don’t look like viable power sources right now. So that leaves natural gas as the remaining option.
That’s the demand side of the equation. In terms of supply, there’s a lot of production, but it’s not quite as straightforward as that.
Natural gas gets produced as a by-product of drilling for oil. But in most places, the infrastructure to process it just isn’t there.
By contrast, Shell owns pipelines, liquefaction plants, and floating structures for processing natural gas. And that’s a huge advantage.
Is the stock underrated?
Despite its strengths, the stock market seems wary of Shell. Compared to its US counterparts, the stock trades at a low price-to-book (P/B) multiple:
| Stock | P/B ratio |
|---|---|
| Shell | 1.4 |
| ConocoPhillips | 2.4 |
| Chevron | 2.1 |
| ExxonMobil | 2.6 |
Why the discount? The most obvious reason is that the UK government has a less positive view of hydrocarbons than the US.
This, however, is a pretty bad reason. While the UK is imposing windfall taxes on oil and gas firms, less than 5% of Shell’s production is UK-based.
The majority of the firm’s production assets are based in places like Australia and Asia. That means it’s well out of the way of UK windfall taxes.
The stock might be part of the FTSE 100, but the firm is a global business. So investors might be overestimating the tax situation.
What could go wrong?
Shell could be in a really nice position to benefit from a supply and demand imbalance. With investments, however, there are always risks.
Building out the infrastructure to support natural gas transport is expensive. But it is happening, with both the US and Qatar investing heavily.
There are also risks on the demand side. One is the possibility of fewer data centres being built. Governments are increasingly wary of the impact on domestic energy bills. So growth on this front might not be unlimited.
Another is the possibility that power demand drops as AI shifts from training to inference. This means more efficient chips.
These are all possibilities. But until they become more realistic, I think they’re ones to keep an eye on, rather than worry about.
Should I buy Shell?
Shell has done a lot right in recent years. Its focus on natural gas over renewables has proved to be a good one – so far, at least.
The stock also trades at a discount to the US oil majors for reasons I find hard to discern. And that’s something to take seriously.
Could Shell be the UK’s most underrated stock right now? I’m not sure – but I certainly think it’s worth a look for investors.
Should you invest £5,000 in Shell Plc right now?
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Stephen Wright has no position in any of the companies mentioned.
