Chapter 1: Introduction

1.1 Investment Recommendation:

Shell Oil has the second highest P/E compared to its rivals in the sector (only Exxon Mobil performs better). Therefore, investing in Shell’s share means that the investigator will be expecting to have value addition on his or her investment.

Table 1: Summary of Shell’s critical financial parameters as of December 31, 2019 (in USD)

Capitalization  231,184 EV/EBITDA 1.55
P/E ratio 10 ROE 6.58%
P/BV 0.83 Recommendation BUY

Source: S&P Capital IQ financial reports

1.2 Brief Introduction of the Company:

Shell Oil is one of the world’s leading oil and gas exploration and refineries companies (London Stock Exchange, 2020). The company was founded in 1907 through the merger of two companies; the Shell Transport and Trading Company and The Hague based Royal Dutch Petroleum Company and the Shell Transport and Trading Company (London), based in The Hague and London (London Stock Exchange, 2020). However, Shell Oil Company is a subsidiary of Royal Dutch Shell, with its headquarter in Houston, Texas, USA (London Stock Exchange, 2020).  

Although Shell Oil is one of the leading companies in the oil and gas sectors, the company has been accused of many offenses, including accelerated climate change, global pollution, the murder of activists, and violation of the environmental laws (SHELL Oil Company, 2020). The company’s operations in the US are focused on deep-sea exploration in the Gulf of Mexico. Shell works in collaboration with the world’s largest oil and gas exploration company, Saudi Aramco’s Motiva subsidiary, in the refining and distribution of oil products in the US (SHELL Oil Company, 2020). Like other oil and gas companies, Shell Oil produces petrochemicals (sold under the brand Shell Chemicals) and liquefied natural gas (Shell US Gas & Power).

1.3 Revenue Analysis:

Cash flows from operating activities, was $12.3 billion in the fourth quarter of 2019. Total dividends paid to shareholders during the quarter were $37 billion (S&P Capital IQ, 2020). During the close of the fourth quarter, the firm launched another phase of its share buyback program with a maximum amount of $ 1billion for the period up to and including April 27, 2020. Since the program began (July 26, 2018), Shell has purchased cancellations worth nearly $15 billion (S&P Capital IQ, 2020). The positions identified in the fourth quarter 2019, primarily reflect an expense of $508 million associated with impairment and adverse movement in a deferred tax position of $ 292 million, both mostly in Australia, partially offset by a gain of 718 million (S&P Capital IQ, 2020). However, there is a concern over the company’s inconsistence in refining maker gross margins as demonstrated in table 2 below. Generally, there is a notable decline in the gross margin from 2017 to 2019 (S&P Capital IQ, 2020).

Table 2: Summary of revenue sources

Refining marker average industry gross margins $/b
  2019 2018 2017
US West Coast 13.5 11.5 14.0
US Gulf Coast Coking 4.9 7.0 9.9
Rotterdam Complex 2.3 2.5 4.3
Singapore 0.6 1.4 3.6

Source: S&P Capital IQ financial reports.

1.4 Objectives and Methodology

Towards the end of the 2019, Shell Oil was in a strong financial position. For example, the profit margin increased from 5.31% in third quarter to 5.51% in the last quarter.  However, with the onset of the novel Covid-19 across the world, the company’s financial position has been affected just like all the fuel companies due to the locking down of economies (Velavan and Meyer 2020). Indeed, the company’s profit margin dropped from 5.51% in 2019 to to 4.5% in the first quarter of 2020 (S&P 500 Capital IQ, 2020). Therefore, evaluating the company based on the financial reports of March 2020 to September 2020 would not give the actual valuation of the company. Consequently, the fiscal year 2017 to 2019 will be used in this investigation.

Silva and Fernandes (2011) defined financial analysis is a tool that is used by economists to make investment decisions. Consequently, in this dissertation will assess the financial reports, trends, and the market in which Shell Oil operates in and make an investment decision to a would-be investor. Notably, the report will show that the company is in a strong financial position, hence the need to invest in the firm. The investor hopes to use the results obtained herein to persuade investors to BUY in this company. By showing that the firm is in a healthy financial position, then this dissertation will persuade a would-be investor to buy in the company’s stock.

While analyzing the financial reports of the company, the investor relied on a secondary approach in data collection. Data was obtained from the company’s website and financial website, in this case S&P 500 Capital IQ. Further, secondary data was collected from magazines. Peer-reviewed journals, textbooks, and past investigations by the company contained in financial reports. The choice of secondary approach is based on the fact that the method of data collection is fast, efficient, and cheap. Once that was obtained, it was analyzed quantitatively using percentages and ratios. The analyzed data was presented using tables, line graphs, pie charts, and bar graphs. Valuation of the company was done using discounted cash flow (DCF) and Enterprise Value/EBITDA.

Chapter 2: Economic Analysis:

2.1 Overview of the Topic:

This chapter entails an analysis of economic drivers for Shell Oil, for instance, the firm’s local economic activities, the economic outlook of the firm as dictated by the global macro events. Moreover, the chapter will analyze some of the global and regional factors that have a significant impact on the oil and gas sector as a whole and Shell Oil in particular.

2.2 Global Economic Outlook:

            2.2.1 Impact of Covid-19 on Oil and Gas Sector

Demand for global energy products, particularly petroleum products has declined by an estimated 10% between January 2020 to early March 2020 due to the spread of COVID-19 (Norouzi, de Rubens, Choubanpishehzafar, and Enevoldsen, 2020). This drop in demand for oil is critical because of oil essentials in the transport and manufacturing sectors. However, with the onset of the disease, countries introduced various measures, among then closure of airports, lockdown, and mandatory quarantine, working from home, and reduced domestic and international travels. A sharp fall in national consumption of oil and gas products and a possible drop in new investment due to a decline in tourism and business travel has led to a significant decrease in demand for petroleum products (Norouzi et al., 2020).  

Indeed, Lyke (2020) opined that novel Covid-19 has significantly reduced the global demand for petroleum products, mainly due to the disruptions in the transport sector. When the Covid-19 was declared a pandemic, countries were locked down with the transport sector being halted. The industry is the single largest consumer of petroleum products in the US, China, the European Union, and Japan (Lyke, 2020). The halting transport sector caused an oversupply of oil in the market (due to the existing stock) and low demand for the products. The overall impact was the lowering of prices of fuel by significant companies, which resulted in reduced revenues. However, it is not clear for how long consumers will enjoy the low prices since there may lead to a decline in oil products in the market. Indeed, as major suppliers such as BP group, Shell, and Mobil Exxon had their operations significantly affected, it remains unclear how they will respond to these losses (Gössling, Scott, and Hall, 2020).

If global (energy) oil prices fall sharply (in the event of an adverse price shock), similar to the current decline in oil prices, an immediate negative impact on the net oil exporters’ gross domestic product is expected due to falling oil revenues. At the same time, this sharp drop in oil prices is seen as a positive supply shock for net oil importers. As a result, the energy consumption of energy importers has increased, and this indirect impact will likely have a positive effect on oil exporters (del Rio-Chanona, Mealy, Pichler, Lafond, and Farmer, 2020).

Shell Oil has also been impacted negatively by the Covid-19 in terms of revenue generation and the healthcare of its employees. Firstly, the company has been forced to lay off some of its employees who directly or indirectly depend on it. Further, based on the first-quarter results released at the end of April 2018, the company’s revenues were projected to decline. For example, the Downstream production was expected to fall in a range of 95-96% while the Upstream sector was projected to fall by 45% compared to the results of the fourth quarter of 2019 (S&P Capital IQ, 2020). The overall productivity of Shell Oil was also projected to drop significantly.

2.2.2 Increase in Global Demand for Oil

The global oil demand increased by an estimated 0.9% in 2019, an equivalent of 120 million tons of oil equivalent (Mtoe). The increment represents a 40% growth rate compared to 2018 (Yesilyurt, 2019). The increase in developing infrastructure across the world and economic growth in emerging countries such as Argentina, Russia, and Saudi Arabia. However, global GDP fell to 2.9% in 2019 from 3.6% in 2018 (Yesilyurt, 2019). However, economic growth was felt indifferently across the globe. For example, in India, economic growth fell from 6.8% in 2018 to 4.8% in 2019, while in China, economic growth dropped to 6.1% in 2019 from 6.6% in 2018 (Newell et al., 2019). Nonetheless, in Qatar, the economic growth increased by 7% from 2018 to 2019, which is attributed to the improved infrastructure development due to World Cup 2022 (Newell, Raimi, and Aldana, 2019).

The oil demand is projected to decline in 2020 compared to 2019 by an estimated 25%, although way below the historic 2010 average significantly (Driscoll, 2020). This slowdown was mainly due to slower global economic growth and the impact of slowing growth in mild weather for warming and cooling (Newell et al., 2019). However, there have been significant changes in various energy sources, with coal decreasing in absolute terms and renewable energy sources experiencing record increases. Electricity demand is growing at the slowest since the economic depression. Energy efficiency continues to improve but remains at levels well below the levels needed to cover Climate Change Agreement (CCA-related CO2 emissions) from power generation declined significantly in developed countries (Newell et al., 2019).

2.2.3 EU and US Energy Consumption:

In the US, energy consumption fell 0.6% in 2019, which was suppressed by more cooling weather patterns and slowdown in the economy. The transition of fuel source from the pollutant coal to gas is accelerating, reducing coal use by nearly 15%, levels not seen in the country since the 1950s (Newell et al., 2019). The ongoing revolution of green technology and SDGs has contributed to the reduction of gas prices to about 20% globally, driving the switch from coal to oil in the energy sector, thus creating a 3% increase in the use of natural gas (Newell et al., 2019). Renewable energy sources are growing at a faster rate compared to natural gas in the global market. It is estimated that the share of renewable energy sources in production rose to 18% in 2019. Energy consumption in the EU fell by 2% in 2019, while coal consumption fell by 19% due to trends in the energy sector while industrial production decreased compared to 2018 (Newell et al., 2019). However, the average efficiency of the vehicle fleet in the European Union continues to improve, as the adoption of SUV vehicles continue to gain momentum. Indeed, the consumption and usage of electric cars both in the EU and the US has resulted in a reduction of oil demand by 15,000 barrels per day (kb/d) (Kasman and Duman, 2015).

2.3 Relationship between Oil Consumption and GDP Growth

Energy is an essential part of the economic development of a country. Among various sources of energy, such as coal, oil, natural gas, electricity, the solar, wind, and nuclear power, oil continues to play an essential role in a country’s economy (Valvi and Fragkos, 2013). It supports, for example, transportation, industry, and households. For instance, in this dissertation, the relationship between GDP growth in a country and oil consumption will be explored using the Indian economy as evaluated by the British Petroleum in a 2019 case study as reported by Valvi and Fragkos, (2013). On the onset, oil is the country’s largest energy source, accounting for 31 percent of primary energy consumption. In 2018, India’s oil consumption was 239.1 million tons of oil equivalent, an increase of 5.3% compared to the previous year, and constituted 5.1% of total world oil consumption (British Petroleum, 2019). In terms of barrels per day, the country consumed 5,156,000 barrels per day (b/d), 5.9% year-on-year, and 5.2% of global oil consumption in 2018 (Valvi and Fragkos, 2013).

India is the world’s third-largest consumer of crude oil in the reporting year, just behind the US (20,456,000 b/d) and China (13,555,000 b/d) in terms of consumption (Wickman, 2014). Due to the rapid economic growth, India’s energy consumption has increased rapidly over the years in terms of energy consumption per capita and oil consumption (Wickman, 2014). In figure 1 below, energy consumption in Indian oil consumption against the GDP. India is used in this context as one of the leading countries in per capita consumption of oil and also among the emerging economies in the world. Therefore, showing that GDP growth and oil consumption are related, then we can use Indian economy to show that Shell Oil activities should be concentrated in developing and developed economies.

Historic growth rates of GDP, oil consumption, car registration ...

Figure 1: the relationship between the Indian GDP and Oil Consumption. 

Source: Shell Oil Ltd, 2019

India outperformed China and, according to statistics and contributed most to the increase in oil consumption by 21.8 percent in 2016. Besides, industrial fuels contributed more to this growth than automotive fuels (Yao, Luo, and Rooker, 2012). This reflects a shift to more efficient petroleum coke away from coal and increases economic activity. Oil consumption in India rose 8.3 percent to 212.7 million tons in 2016, compared to the global growth of 1.5 percent. This makes it the third-largest oil consumption in the world, after surpassing Japan, with nearly 4.8 percent of total consumption in 2019 (Charfeddine and Barkat, 2020).  

However, from a per capita perspective, oil consumption in India is still relatively low compared to the world’s largest consuming countries and other non-OECD countries. Interestingly, even though India has a population of 1.3 billion, it still lags other power plants in developing countries in per capita oil consumption, enabling rapid growth (Charfeddine and Barkat, 2020). Since the Indian government aims to increase the share of the manufacturing sector in the gross domestic product (GDP) at the beginning of the next decade from about 15 to 25 percent, a significant increase in energy demand and higher consumption of oil is in production. It should also be noted that a program to build infrastructure (national roads and highways), partly financed by revenues from higher taxes on petroleum and petroleum products, is likely to support the country’s demand for oil (Yao, Luo, and Rooker, 2012).

2.4 Oil Prices and Exchange Rates:

As noted, Shell Oil has offices in over 130 countries across the world. The USD is the currency used in its transactions, both imports and exports. Moreover, the reporting standards adopted by Shell Oil require that financial reporting be done in USD. Therefore, the sales revenues all segments must be converted to USD thus affecting Shell’s profitability in one way or another. Thus, depending on the strength of the dollar, Shell Oil will either gain or lose when the exchange rate is applied. This is mainly so during import and export trade. 

There has been a sharp increase in oil prices, coupled with oil volatility in the global market. These effects have coincided with a closer relationship between oil and asset prices, particularly the exchange rate. At the same time, there has been no such systematic correlation in the last three decades. These are essential questions in understanding oil price dynamics is what this dissertation will show concerning the financial market perspective. There is a large body of literature analyzing the relationship exchange rates between USD and other stronger currencies with global oil prices. For example, Killian and Park (2009) showed that oil prices have a direct effect on the number of particular assets at monthly data frequencies, such as stocks on the US stock market.

Furthermore, there is a new relationship between the price of oil and the exchange rate. In their investigation, Chen, Rogoff, and Rossi (2009) show that the value of a goods exporter’s currency contains details on future commodity price movements. In contrast, commodity prices have been used to give a predictive power of prices of commodities, including the buying and selling of currencies in the global market (Ferraro, Rogoff and Rossi 2012).

Figure 2: showing the relationship between exchange rates and oil prices 2010-2020.

Source: Sell Oil Company, 2020

In particular, our results show a causal relationship between the exchange rate and oil prices, which runs in both directions. The 10% increase in oil prices caused the USD’s effective exchange rate to fall by 0.30% (Chen and Cao, 2019). In comparison, the 1% weakening of the USD caused oil prices to increase by 0.73%, thereby resulting in a negative casualty in the two directions as intuitive from many points of view. Because oil is valued in US dollars, the devaluation of the US dollar makes oil cheaper in the local currency for countries that are not tied to the US dollar, increasing global oil demand and oil prices (Chen and Cao, 2019). Likewise, oil exporters, who mostly import outside the US dollar, face budgetary pressure because of the smaller decline in the US dollar. Therefore, they can change their prices and production to cause an increase in the price of oil. Also, an exogenous increase in oil prices could lead to a decline in the supply of USD in the market if it affected relatively oil-intensive countries like the United States or increased oil recycling of demand for essential commodities from other regions like Europe (Chen and Cao, 2019). Because oil is denominated in US dollars, then USD can be used to hedge against itself, thereby stimulating demand for oil as a significant financial asset.

2.5 The Role of OPEC in Global Oil Prices:

Many of the world’s greatest producers of oil have formed a cartel that protects them from exploitation by non-oil producers (OilPrice.Org., 2020). This cartel is in the form of an organization called Organization of the Petroleum Exporting Countries (OPEC). Since 2016, OPEC merged with other leading non-OPEC but oil-producing countries to form a more reliable entity called OPEC+ (OPEC Plus). Like OPEC, the main objective of OPEC+ is to control the prices of oil globally and safeguard its members from exploitation in the global oil market. OPEC is under control of over 90% of oil reserves and controls more than 50% of the world’s oil supply (OilPrice.Org., 2020).

As a cartel, the OPEC+ members agree on the exact amount of oil that to be extracted and distributed in the market, thereby directly impacting on the supply and prices of oil in the global market, at any given time (OilPrice.Org., 2020). Consequently, OPEC+ directly affects the prices of oil in the worldwide market by keeping the prices relatively high to increase the profits for its members. For example, is the cartel is not satisfied with the amount of oil, it should reduce the fuel supply to increase the price. However, the fact is that no country wants to cut supply as this will result in lower incomes. Ideally, the OPEC+ members want to increase oil prices by increasing the demand for oil in the market (OilPrice.Org., 2020). Unfortunately, this is not a market dynamic. Hence, OPEC+ pledge to reduce supply triggered a surge in oil prices. Over time, prices return to their typically lower levels unless the supply is significantly reduced or demand is adjusted.

2.6 World energy consumption and fuel mix:

The fuel mix is the combination of various fuel sources that are consumed as sources of energy, among them fossil, biomass, and renewable sources, among others (Kumar, Verma, and Talwar, 2020). As the world leaders push for greener and more friendly sources of energy, there is a need for the adoption of renewable sources of energy. However, the most intriguing thing is that fuels cannot be substituted directly from one to another, for instance, oil replacing coal or gas replacing oil due to the nature of their usage. For example, electric-powered SUVs cannot use fossil fuels since their engines are not compatible with fossil fuels. Industrialization of the 19th century was dominated by the use of coal as the primary source of energy in fueling the steam engine, electricity grid, and railway systems (Kumar et al., 2020). Different fuels have emerged in the later years of the 20th century as alternative sources of coal and successfully used in heating, transport, chemical feed, and running of engines. However, the competition among new sources of energy meant that fuel maintained its stronghold in power generation over the other new sources (Kumar et al., 2020).

Chapter 3: Industry Analysis

3.1 An Overview of Shell Oil in Oil and Gas Sector:

Shell primarily uses a geographic segmentation strategy to work with customers. Because of this, they had to focus mainly on geography to sell their products. Indeed, Shell ranks 50th on Forbes magazine’s list of 2,000 global brands (SHELL Oil Company, 2020). The brand is valued at $ 210 billion using the market cap method (as of May 2016). Its strong links with sporting events such as Formula 1, other racing events, and the brand’s uniquely evolved logo have helped increase its visibility (SHELL Oil Company, 2020).

Growth in the euro area increased from 1.8% in 2016 to 2.4% in 2017, while Shell’s growth in the emerging economies increased significantly. For example, in China, the growth improved by 0.1% in 2017 to 6.8% (SHELL Oil Company, 2020). In contrast, India’s growth slowed over the same period, partly due to uncertainty about new policies (such as the imposition of taxes on imports). The recovery of exports and domestic demand supported the recovery in Brazil, Russia, and Turkey (SHELL Oil Company, 2020).

The industry in which Shell Oil operates in has low power of substitute products, but the prices are highly volatile. Due to the high government regulation and high cost of infrastructure and technology investment in the business, there are high barriers to new entrants. Moreover, when a company enters the industry, it can only survive if capable of amercing large volumes, thereby increasing competition. Shell faces stiff competition from other established multinational companies such as ExxonMobil, BP Group, Z Energy, OMP, among other companies (SHELL Oil Company, 2020). Government agencies and environmental conservation agencies highly regulate companies in the sector. Although the industry is perceived to be profitable, it faces challenges such as limited resources, government regulations, high taxation, exchange rates, price fluctuations, and the emergence of renewable sources of energy. These factors limit the growth and development of firms in the sector. However, back and forth integration helps companies in the industry cope with changing customer needs.

3.2 Industry Trends in 2019

3.2.1 Minimize Reliance on Fossil Fuels: 

Domestic hydrocarbon production has been declining since the late 1990s after the industry hit a record high of around 50 million cubic meters (MM3) in 1998 with an average daily production of approximately 850,000 barrels. The industry has begun to react to the adverse conditions of the economic environment, a situation closely related to the selected growth model in the 2003-2015 period (Newell and Prest, 2019). The main characteristic of which is the implementation of measures to promote demand to exceed supply disproportionately, such as pointing to a gradual but steady decline in investment in almost all manufacturing sectors. Since then, the reduction in hydrocarbon production and rising energy demand has led to a supply crisis that has to be overcome by a significant increase in gas and electricity imports since 2011, which has resulted in a substantial deficit in energy bills in 2013 of just under 7,000 million USD (Newell and Prest, 2019).

 At present, the prospects for oil and gas production areas, especially those related to non-traditional resources, as well as the country’s natural and technical potential and improvements depicted in taxation and business scenarios, identify the reasons necessary for the level of investment and production in this branch to finally stabilize and chronic deficits in retailers’ energy balance can be corrected in a relatively short time. The average trade deficit on the fuel and energy bill has remained around $3 billion, a 55% increase from the 2013 result (Newell and Prest, 2019).

3.2.2 Adoption of Greener Sources of Power by Oil and Gas Companies. 

Oil and gas companies are using on-site renewable energy generation as a source of an effective and greener alternative to diesel (Madrahimova, 2020). By replacing the pollutant generators with solar photovoltaic systems and batteries, the company was able not only to reduce harmful emissions significantly but also to fail with a five-year investment. For example, Oil and Gas firm, Equinor recently connected the Johan Sverdrup field 140 km offshore en-route to electrification (Madrahimova, 2020). Suppose the upstream producer draws electricity from most of its operations. This could add up to 2020 tCO2e per year with a reduction by 2050, which is roughly 10 USD / tCO2e, depending on local electricity costs (Madrahimova, 2020).

3.2.3 Need for Greenhouse gas (GHG) Emissions

Businesses can reduce stable methane and greenhouse gas emissions by increasing leak detection and repair (LDAR), installing cash recovery devices (VRU), or using the best available technology such as dual mechanical seals on pumps (Dube and Nhamo, 2020). Dry gas seal on the compressor and a set of carbon packing rings on the valve stem). One company replaced the seal on the pressure relief valve, which is considered a common leakage source, and then succeeded in restoring this stored or trapped gas flow. The stakeholders believe that the reduction in fugitive and combustion emissions can add 1.5 GtCO2e to the annual reduction by 2050 at the cost of less than 15 USD /tCO2e (Dube and Nhamo, 2020).

3.3 PESTEL analysis

3.3.1 Political factors

Political factors are critical since they include government actions and interventions, thereby affecting the organization’s performance or economy in general. Political factors heavily influence oil and gas producing companies. For example, the companies are not only governed by their government but also OPEC+ and International Energy Agency (IEA). The government imposes taxes on fuel and oil imports, as well as taxes on carbon emissions (Peruvian tax). However, oil companies have formed partnerships with the government to ensure survival and economic development as the government gives incentives to the oil companies. A collaboration between the government and oil companies is the primary survival tactic of Shell. For example, in the US Shell Oil has collaborated with the government in the following programs; Mercy Corps, Alliance to End Plastic Waste, Roundtable for Sustainable Biomaterials (RSB), among other initiatives. However, this approach has seen the company being accused of supporting dictatorial regimes and murdering of local activists—for example, the Ogoni executions in oil-rich Niger Delta. A Dutch court in April 2019 ruled that Shell was involved in the execution of nine activists (Saro Wiwa, 1989; Amnesty International, 2019).

3.3.2 Social factors

Social factors are those factors that influence the population, growth rate, career quality, safety of employees and society, and health awareness. Shell Oil has been accused of and faced various legal cases regarding air pollution (Weber and Feltmate, 2016). In the past, the Shell company has endured a frosty relationship with environmental activists who accuse the company or murdering those who voice concerns about its activities (Weber and Feltmate, 2016). However, several years ago, Shell advertised itself as a responsible oil producer, saying that it used waste to grow flowers. The firm has also sponsored several corporate responsibility programs as public relations (PR) strategies.

3.3.3 Economic factors

Economic factors have an impact on the overall profitability of a company Weber and Feltmate, 2016). Shell’s growth over the last decade has been attributed to infrastructural development in developing and emerging economies. However, the increase in the standard of living across the world means that the number of motor vehicles is increasing hence the demand for oil products. However, Shell has faced economic challenges due to the volatility of oil market prices. Government taxation is also very high, thus reducing the firm’s profitability. For example, in 2016, Shell recorded an estimated $1 billion loss, the worst since 2008-09 economic recession in the US (S&P 500 Capital IQ, 2020). Moreover, Oil and Gas companies have to contend with the high cost of production. Nonetheless, the energy demand is increasing, and it is expected to grow by around 57% in 2030 (Pham, 2018).

3.3.4 Technological factors

Technological factors include issues such as technological advances, technical incentives, R&D, and automation. Technology is important in the oil and gas sector for exploration, refinery, transportation, and supply chain management (SCM). Shell and its peers in the sector have benefited from recent technological development. For example, technological advances have resulted in innovations in oil and gas drilling and more efficient production machines. However, the new, capable tools and devices are quite expensive for smaller companies.

3.3.5 Environmental factors

Environmental factors mainly consist of climatic factors that influence the operations of an organization (Oxford University Press, 2010). Studies show that climate change is associated with carbon emission from fossil fuels. Among the proposals in SDGs is to reduce reliance on fossil fuels, which is likely to hurt the operations of Shell Oil Ltd. On the contrary, Shell has invested heavily in fuel production and is currently considered among the most intensive companies in the world in terms of GHGs emissions (S&p Org., 2019).

3.3.6 Legal factors

Legal factors focus on elements such as health and safety laws, consumer protection laws, employment & discrimination laws, and antitrust laws (Oxford University Press, 2010). Carbon emissions and environmental safety regulations have been improved for all oil and gas companies, including Shell Oil. With concerns about dramatic climate change and global warming increasing, the pressure is increasing on governments and international regulators to develop new regulations that will help reduce environmental damage (S&p Org., 2019). Shell is one of the top regulatory focus companies.

3.4 Porters Five Forces Analysis:

3.4.1 Threats of new entrants

A new participant in Oil & Gas offers Royal Dutch Shell Plc innovation, a new approach, and pressure through lower pricing strategies reduced costs and new advice for the benefit of customers. Royal Dutch Shell Plc must face all of these challenges and put in place effective barriers to protect its competitive advantage (SHELL Oil Company, 2020). Royal Dutch Shell Plc has offices in more than 130 countries around the world, which means that economies of scale are enhanced, strong global image, and well-established brand. Moreover, the high cost of operations and starting new plants is very high in the sector. Therefore, threats from new entrants in the industry are very low.

3.4.2 Threats of substitute goods

The threat posed by the substitute players is quite high in the sector since oil, chemical, and natural gas products produced by various companies are highly interchangeable among rivals (SHELL Oil Company, 2020). The leading competitor’s product can be used as a substitute for the company’s product. Hence, the threat posed by corporate proxies is high.

3.4.3 Bargaining power of suppliers:

Shell Oil Plc adopts a vertical integration growth, thereby enhancing mergers and acquisitions with other companies and government agencies at various levels of operations. Therefore, the firm has a significant role in the supply chain. Moreover, Shell has increased its technology capacity through its projects and business technology segments (SHELL Oil Company, 2020). Therefore, the bargaining power of suppliers in this sector is low.

3.4.4 Bargaining power of consumers

Oil and gas products are the main drivers of any economy. The processes of production, transportation, and manufacturing are dependent on these products. This explains why the sector is a government’s priority in most emerging economies across the world (S&p Org., 2019). Besides, most buyers of petroleum products buy in large quantities, and therefore losing one buyer will significantly affect the company’s earnings. Consequently, it can be argued that the bargaining power of consumers is average.

3.4.5 Threats of Rivalry

The company’s main competitors include Exxon Mobil Corporation, BP Plc, and Total, which has also built a global presence in the oil and gas industry (Spence, 2011). The competitiveness of these companies is high due to the branding and differentiation strategies of companies in their global activities. The company has established a globally recognized brand and large customers, which makes competition in the industry high.

Chapter 4: Literature Review on Related Topic

4.1 Introduction

The topic chosen is the impact of volatility in the oil and gas sector on company’s profitability. Concerns about rising global oil stocks grew as core demand weakened due to the coronavirus outbreak, and falling OPEC momentum has resulted in significant volatility in the oil market, resulting in lower prices to levels that producers believe. The collapse of talks between OPEC and Russia, which led to Saudi Arabia announcing plans to increase production from 9.7 million barrels per day to more than 11 million barrel per dollar on April 9, 2020, has hit all oil producers. This has increased volatility in the oil market consequently affecting the valuation of the share price of most companies. 

In such a rapidly evolving situation, it is difficult to determine the extent of the need for the coronavirus to be eradicated, but it is clear that the current reduction has a significant and rapid effect. We now seem surprised by the 2008 style of demand which, together with the supply shock caused by Saudi Arabia, created an environment in which oil prices could fall above the curve. industrial operating costs or the rate at which manufacturers are considering closing some of their wells. For West Texas Intermediate (WTI) crude, we estimate that the top of the operating cost curve is between $25 and $30 per barrel.

The boom in US shale and gas production, and the associated productivity gained as technology advances and the scalability of these companies, continues to press the industrial economic curve and drive operational efficiency. Oil production. The shorter development times associated with shale oil and gas wells have also helped these players gain market share. We would therefore not be surprised if “$45 a barrel is a new $50 a barrel for WTI” when we come back from this decline as productivity gains continue to build up.

4.2 Empirical Studies:

The long-term relationship between the cost of fuel and the prevailing exchange rate has been analyzed in several studies in several countries. One of such investigation was conducted by Chaudhuri and Daniel (1998) to show the relationship between prices of oil and exchange rate and the impact of the two real and expected returns. The bottom line is that Chaudhuri and Daniel (1998) confirm an existing inverse relationship between the exchange rates and prices of oil. One such study focuses on the relationship between the real price of oil and the US dollar’s real exchange rate. Many authors have identified a long term relationship between the two, suggesting that the real effective appreciation of the US dollar over the long term coincides with the actual increase in oil prices.

Clostermann and Schnatz (2000) showed that there exists a long-run relationship between the exchange rate of the US dollar against the euro and the price of oil. Moreover, the duo evaluated real US exchange rates for 16 OECD countries and the interrelationships between most of them made of them. Chen and Chen (2007) used a group of G7 countries and established a correlation between real oil prices and the movements in actual exchange rates. However, it should be noted that having a long term relationship between the two does not mean a healthy relationship in the short term. With linear models, in most cases, the correction to restore equilibrium is estimated over five years, which raises questions of practical significance. Several studies do not show a cointegration relationship between exchange rates and oil prices.

Maslyuk and Smyth (2009) examined the general integration between oil spills and future prices of the same and different classes in structural change. The aim of this study is to investigate whether spot prices and oil futures of the same and different categories are integrated together using residual-based cointegration tests that allow structural breaks in cointegration vectors and high-frequency data. The US WTI and UK Brent crude oil was selected as the representative product for analysis, because these two commodities have a known relationship spot and futures market.

Jones and Cole (1996) in their investigation exampled the relationship between the stock market ad oil shocks in the international market and the current and future cash flows or expected returns in the market. The duo established that the expected returns in the Canadian, Japanese, and US market reacted negatively to the adverse effects of oil price fluctuations in these economies. While using GARCH and Granger causal tests to data collected between 1970 and 1995, Jones and Cole (1996) showed that stock market investors have a tendency of reacting to short-run changes in the global oil prices. Consequently, the duo argued that response to oil prices by the US and Canadian stock prices shock in the sector can be justified due to the impact of these fluctuations on the real cash flows. However, the Japanese and the UK oil price innovations were found to produce larger chances in the share price than the justified changes in expected returns or real cash flows.  

Siliverstovs, Hegaret, Neumann and Hirschhausen (2005) examined the degree of integration of the natural gas market and its relationship to oil prices determined by analyzing the principal components and, based on Johansen, based on probability, the method of mutual integration for the European, North American and Japanese markets for the period between the early 1990s. -an and 2004. In their analysis, the investigators established that there existed a high degree of integration between oil prices in European market and the North American market. On the flip side, the investigators found that there European, Asian and US markets were not integrated thereby confirming earlier investigations that showed markets in these continents are not integrated with oil and stock prices.

Pushpa, Chakraborty and Mathur (2011) on their part examined the correlation between stock and oil prices in two important developing countries in Asia; India and China. With India and People’s Republic of China being the main markets for oil consumption, their stock markets are likely to be vulnerable to fluctuations in oil prices. A number of dates from January 2000 to May 2011 have been examined. The stationary character of the data set was examined by means of the Dickey-Fuller argument test (ADF). The Johansen cointegration model is applied to build cointegration between oil prices and Indian and Chinese stock prices. VECM (Vector Error Correction Models) is used to track the existence of long-term relationships between variables. The results of the joint integration analysis show that there is a long-term relationship between the oil price and the stock market price of the two countries.

Jose and Joutz (2006) examined the time series econometric relationship between Henry Hub’s natural gas prices and WTI crude oil prices. These relationships are usually approximated with the help of simple correlations and certain trends. If, as in this case, the data has a single root, then the analysis is wrong and returns the wrong result. The analysis confirms the existence of a co-integration between prices of natural gas and crude oil series and provides a critical evidence in that statistically Hub’s natural gas prices and WTI crude oil prices have a long-term relationship. The main finding of this analysis is that the prices of natural gas and crude oil have been stable in the past even in the periods in which separation was possible. VECM’s crude oil and natural gas prices are valued and allow long-term analysis of relationships for co-integration and short-term price adjustments. Evaluation of the model leads to the identification of indications of a stable correlation between the price of natural gas and that of crude oil.

Oil Market Volatility and Revenue Generation

Various investigations have been carried out on the impact fluctuations of crude oil on the revenue generated by oil companies such as Shell Oil. An investigation by Driscoll (2020) showed that when consumers pay higher income for crude oil, energy exporters receive higher income as importing countries are obliged to pay more for their energy reserves. In this way Driscoll (2020) argued that oil price fluctuations can hamper the development of the crude oil market and affect the decision-making steps, production rates and investment of petrochemical companies. In addition, the Gulf countries export a lot of crude oil and other petroleum products, which is detrimental to their economic growth. Given Saudi Arabia, the world’s largest exporter of crude oil and other petroleum fluids, the country’s total exports make up the largest share of its total revenue. A drop in crude oil prices could put the Saudi economy under budgetary pressure and worsen its financial situation.

Gulf-based companies seek to challenge each other by offering competitive prices or similar high quality features at very competitive prices for crude oil products. Oil prices in the Middle East and Africa The crude oil market is mainly affected by OPEC policies. Other factors influencing a company’s strategy can range from specific weather or seasonal events to supply disruptions such as worker spills or strikes to political instability in oil-producing countries. For example, the Teheran, Iran-based National Iranian Oil Company (NIOC), which has been operating since the early 1950s, has shifted its focus to forging strategic alliances to improve the stability of the volatile crude market. The company directs exploration, drilling, research and development, production, refining, export and sales of gas, oil and petroleum products. They are taking a further step to accumulate their production capacity by drilling new oil wells. The complexity of economic and political relations between consumer countries influences their expansion.

The same is true of the Saudi Arabian company Saudi Aramco, which is not only a fully integrated global oil and chemical company, but is also a state-owned oil company. The company’s massive global presence creates income and expenditure problems due to currency risks, changes in laws, and fluctuations in product standards in other countries. The problem of changing legal regulations or government policies in developing countries where companies operate can be an obstacle to solving the problem of volatile crude oil prices. Kuwait Petroleum Corporation specializes in production, petroleum exploration, petrochemical, refining, marketing and transportation. However, it carries extraordinary risks associated with increasing adjustment costs for crude oil. High availability of crude oil or a downturn in the global economy can lead to lower oil prices. A price increase occurs when there is a large difference between the demand for crude oil. However, various forms of technological advances in high volume hydraulic fracturing and horizontal drilling on land have driven the growth of the crude oil market. The increasing demand for petroleum products from the transportation sector has also significantly increased the world crude oil market.

Chapter 5: Company Analysis

5.1 Overview of the Chapter: 

In this chapter, the internal analysis of the Shell Oil Company will be undertaken. The firm’s governance structure, strategy, management team, ownership, and governance will be covered. Financial analysis of the company, balance sheet, income statement, cash flows, liquidity will be covered. Moreover, the firm’s SWOT analysis and share price and volatility will be evaluated as discussed herein: 

5.2 Shell Oil Company Strategy:

Shell Oil’s strategy is to strengthen its position as a leading energy company by delivering oil, gas, and low-carbon energy as the global energy system changes. Shell Oil Company operations are guided by compliance with the government’s policy, safety, ethics, corporate social responsibility, and environmental sustainability. The company works in collaboration with government agencies as a way of protecting itself from fines and heavy taxation by the government. Also, Shell uses M&A (mergers and acquisitions) to grow its portfolio. For example, in February 15th, 2016, Shell acquired BG Group a $70 billion deal that enabled the firm to create more predictable returns and higher free cash flow per share. The merger was a success in that the company recorded an increment of $3.5 billion in pretax profit in 2017 fiscal year.

5.3 Business model:

Shell business is divided into four sections: upstream, integrated gas, downstream, and projects and technology. Revenue collection per segment for the fiscal year 2019 was as follows; upstream ($9.97 billion), integrated gas ($41.32 billion), downstream ($293.55 billion), and corporate ($45.0 billion) as recorded by S&P 500 Capital IQ (2000. Upstream deals with oil and gas facilities worldwide, deep-water and shale. Upstream is responsible for the extraction of crude oil and natural gas. The integrated Gas section deals with the production and distribution of natural gas and liquefied products through the Shell brand. On the other hand, the downstream business manages the distribution of a wide range of oil and chemical activities, including trading and marketing. Shell’s petroleum products are sold worldwide for household, industrial and transportation purposes. Similarly, the firm’s petrochemical products are used by industrial customers. Finally, Project and Technology organizations manage large-scale project implementation and drive R&D to develop innovative technology. 

5.4 SWOT and Market Analysis:

5.4.1 SWOT Analysis:

SWOT Analysis is a tool that evaluates the macro and micro-business environment to determine the competitiveness of a firm. SWOT focuses on the company’s strengths against its weaknesses (SW) and opportunities agonists threats (OT). The chart below summarizes Shell’s SWOT analysis.

Table 3: SWOT Analysis

Strengths: Shell is a giant multinational oil and gas company with a strong brand positioning. Shell has a strong financial performance ensuring efficiency in service delivery. Shell has a robust supply chain management (SCM) strategy. Shell’s business model is based on the integration of business activities with societal needs. Shell focuses on technology and innovation. Weaknesses: Shell struggles to solve trust and safety issues. For example, Shell Oil contributes about 40% of spillage in Niger Delta (Saro Wiwa, 1989). The company is accused of sponsoring murdering of environmental activists. Shell’s earning is not stable due to the sector’s volatility.
Opportunities: Rising demand for LNG products worldwide. Positive outlook in the emerging African and Asian oil and gas industry. Improvement in the research and technology sectors. Threats: Disruption of the firm’s operations by cyber-attacks. High competition in the oil and gas sector. Volatility and fluctuations of prices of crude oil, natural gas, and petrochemicals.

Table 4: Shell Oil Company’s SWOT Analysis

5.4.2 Market Analysis:

The market analysis section explores the firm’s share price and volatility in the sector, as discussed herein.

Shell Share Price:

Date Stock price Date Stock price
9/1/2019 54.91 3/1/2020 44.37
10/1/2019 59.43 4/1/2020 34.49
11/1/2019 58.68 5/1/2020 30.78
12/1/2019 58.00 6/1/2020 28.39
1/1/2020 60.37 7/1/2020 30.78
2/1/2020 52.34 8/1/2020 29.64

Table 5: Stock price Shell Oil Company September 1, 2019 to August 1, 2020

Graph 1:Stock price Shell Oil Company September 1, 2019 to August 1, 2020

Market Volatility:

The year 2020 has witnessed the highest volatility in the oil and gas sector, which is primarily driven by the 2019 novel coronavirus disease. The disease has caused a global increase in the crude oil supply following an agreement by the OPEC+ member states to maintain a supply of the precious fuel. With the falling demand in oil, due to economic shutdown and increased supply of the commodity, the daily benchmark for crude oil prices in West Texas Intermediate (WTI) has become extremely volatile, as shown in the figure 4 below. Shell Oil Company, like other global giants in the sector, has been primarily affected by this volatility.

Figure 4: Volatility of the oil market


The implied volatility in the sector measures the near-term prices of the commodity in the market. OVX measures and calculates expected volatility in oil prices by moving the price of financial options for WTI, light sweet crude, to prices in Cushing, Oklahoma. The VIX measures the implied instability of the Standard and Poor’s 500 (S&P) 500, a stock index of 500 large companies listed in the US. Crude oil volatility is usually higher than the volatility of the S&P 500, mainly because the OVX represents changes in commodities, and the VIX represents changes in a group of 500 companies.

5.5 Financial Analysis: Shell Oil Company

Financial analysis of Shell Oil Company for trading periods 2018 and 2019 will be conducted in this segment. Notably, the investigator will analyze the company’s financial statements, balance sheet, income statement, cash flows, and the firm’s liquidity, as reported by S&P Capital IQ financial report.

5.5.1 Balance Sheet:

Figure 5: Balance sheet analysis

Source: S&P500 Capital IQ financial reports.

The balance sheet analysis of Shell (2017-2019) does not give a clear trend in the company’s financial position since there is an increase in the total equity from 2017 to 2018, which is followed by a decrease in the fiscal year 2019. However, the general trend is a decrease in the company’s total assets from $95,400 million in 2017 to $92,690 million in 2019. For total assets, there is also a notable decline in assets from $407,097 million in 2017 to $404,300 million in 2019. In terms of obligations (liabilities), there is a significant increase in total liabilities from $212,700 million in 2017 to $217,860 million in 2019, an increase of 2%. Most importantly, the total equity reduced from $194,397 million in 2017 to $188,440 million in 2019. This total drop-in equity could hurt potential customers’ confidence in the company.

5.5.2 Cash Flow Analysis:

Analysis of cash flow is critical in evaluating the profitability of a business venture. Cash flow analysis helps in determining whether a company can meet its financial obligations: paying taxes, wages and salaries, expenses, and purchase stock. Below is a summary of Shell’s cash flow analysis, as reported by S&P 500 Capital IQ financial reports.

Figure 7: Cash flow analysis

Source: S&P500 Capital IQ financial reports.

There is a replication of balance sheet and cash flow analysis in that there is an increase in cash flow in 2018 but decreases in 2019. It could mean that 2019 was not a favorable year for the company. Based on the two tools (balance sheet and cash flow), potential investors should BUY the company’s stock as the firm will be undervalued.  

5.5.3 Statement of Income Analysis:  

The statement of income is also called the profit and loss account (P&L), and it shows the overall profitability of a firm. A company that makes losses is not attractive to potential investors. Below is a summary of the Shell Oil statement of income for the period 2017-2019, as reported by S&P Capital IQ.

Figure 8: Statement of Income analysis

Source: Source: S&P500 Capital IQ financial reports.

Although there is a general increase in profitability, there drop in profit margin from 2018 to 2019 (just like in the other two analyses). Profits dropped from $23,906 million in 2018 to $16,432 million in 2019 (32.26%). With such a huge drop in profitability, it will be difficult to convince a potential customer to invest in Shell hence justifying the decision to BUY the stock.

5.5.4 Liquidity Ratios:

Liquidity analysis is used to determine whether the company’s current assets can meet the company’s obligations when they fall due. The table 4 below summarizes vital liquidity ratios for Shell, as reported by S&P 500 Capital IQ. Based on the ratios below, Shell is in a strong financial position and ability to meet its financial obligations. Interestingly, in 2019 the liquidity of the firm is more robust despite its profitability going down (see above analysis). Therefore, based on the liquidity ratios, it is advisable to invest in Shell.

Table 4: Summary of Liquidity ratios

2019 2018
Quick Ratio 0.99 0.81
Current Ratio 1.24 1.04
 Debt to Equity 55.65% 37.15%
Total Debt to Equity 66.81% 41.15%

Source: Source: S&P500 Capital IQ financial reports.

Chapter 6: Valuation

6.1 Chapter Overview

Valuation is an essential chapter in this dissertation, as it will justify the recommendation given in the introduction part. Based on the discussions in the previous chapters, the investor will evaluate the company’s financial position and justify the investment decision. This chapter will have three sections; forecast of the financial statements, valuation of the company through DCF (discounted cash flow analysis), market share price analysis, and sensitivity analysis and discussed herein:

6.2 Forecast of the Financial Statements

Based on the company’s financial analysis, it can be argued that Shell’s financial projection does not give any confidence to potential investors. The company is projected to perform poorly in 2020 owing to the continued negative effects of Covid-19. For example, S&P 500 estimates that the company’s profit margin will reduce to -2.5%, with the net sales recording almost 45% decline, as shown in the table below. Although the firm is expected to improve in 2021, in the condition that a business will have stabilized from Covid-19 effects, the firm will not record similar results as in 2019. Therefore, the fiscal year 2021 will be a “recovery year.” The firm is projected to return to normalcy in 2022. In terms of investment, the company’s shares are low, hence a good time to BUY Shell’s share with the hope that the firm’s financial position will improve in 2022 and above.

Table 5: Valuation summary

Fiscal year (Dec) 2017 2018 2019 2020 2021 2022
Net sales 305 179 388 379 344 877 233 378 280 646 307 886
EBITDA 51 182 58 893 60 148 30 683 41 298 50 159
Operating profit (EBIT) 24 959 36 758 31 447 10 221 18 277 25 480
Operating Margin 8,18% 9,46% 9,12% 4,38% 6,51% 8,28%
Pre-Tax Profit (EBT) 18 130 35 621 25 486 -14 511 14 719 23 134
Net income 12 977 23 352 15 843 -5 990 9 510 14 625
Net margin 4,25% 6,01% 4,59% -2,57% 3,39% 4,75%
EPS 1,56 2,80 1,95 0,20 1,13 1,92
Dividend per Share 1,88 1,88 1,88 0,64 0,89 0,88

Source: Source: S&P500 Capital IQ financial reports.

The EV of the company is generally increasing from 2017 to 2019 but is projected to decrease from 2020 to 2022. The EV/ EBITDA ratio is also decreasing from 6.73 to 5.15 in 2017 and 2019 respectively. The price to book ratio is also decreasing from 1.41 in 2017 to 1.24 in 2019 and is projected to continue decreasing. Capitalization of the company is also decreasing from $279,079 in 2017 to $231,184 in 2019 and is expected to further decrease up to 2022. Based on these findings, the company is shares are at low price which is a good timing to buy the shares. In fact, there is a correlation between a decline in the company’s share prices and the negative valuation in the company.

6.3 Discounted Cash Flow (DCF) Analysis:

Discounted Cash Flow (DCF) is a method of valuation of a firm in which the total cash flows are discounted in relation to the initial investment. If the difference between the sum of all cash flows and the initial investment, called the Net Present Value (NPV) is positive, then the firm is valuable and attractive for investment.

Table 6: Discount cash flow Analysis

Year Cash flow in $ 000  when r is 17% DCF in $  when r is 80% DCF in $ 000  
2015 4,560 0.8547 3897.432 0.5556 2533.536  
2016 4,777 0.7305 3489.599 0.3086 1474.182  
2017 13,435 0.6243 8387.471 0.1715 2304.103  
2018 23,900 0.5336 12753.040 0.0925 2210.750  
2019 25,485 0.4561 11623.709 0.0529 1348.157  
Discounted Cash Flow (DCF) 40151.25   9870.727  
less initial investment (I) 25,863   6,000  
Net Present Value 14288.25   3870.727  
IRR   1.0601  
MIRR   1.0238  

From the DCF calculation above, the NPV is positive at 17% discount rate and 80% discount rate. Therefore, it can be argued that the company is favorable for investment. The IRR (internal rate return) for the firm is 1.06 meaning that at 10.6% discount rate, the company will make profit. Based on these findings, the company is favorable for investment.

6.4 Relative Valuation Model:

Under the relative valuation model, the investigator will use financial ratios as summarized by S&P 500 Capital IQ finances as summarized below:

Table 7: Calculation of WACC

Kd Interest rate  
Ke CAPM rf+B(ERP) ERP= Rm-Rf
Rf 10yr yield on UK bonds
ERP KMPG Reports 5.5%
Beta FT, Capital IQ  
WACC 10%

Table 8: Comparison of valuation analysis in the sector

Relative Valuation Shell (2021E) BP (2021E) Exxon (2021E) CNOOC (2021E) Average Premium/(Discount)
P/E 10 8 12 7 9 11%
P/BV 0.83 1.1 0.95 0.75 1.03 10%
EV/EBITDA 1.55 1.54 1.08 1.11 1.3 8%  
P&L 5,799 8,799 6,205 33,256      

Source: S&P Capital IQ financial reports

6.4 Sensitivity Analysis

Below is a summary of the sensitivity analysis for the Shell Oil Case Study.

Table 9: Sensitivity analysis

Oil Price 7% 10% 13%
40 16.00 16.00 16.00
50 27.56 27.56 27.56
60 43.60 43.60 43.60
70 68.01 68.01 68.01

Source: investigator

Where the formula for sensitivity analysis is given by A= X2+ Y2

Where A is the sensitivity ratio, X is the oil price, and Y is the WACC in percentage.


In this dissertation and financial valuation and non-financial valuation of Shall has been undertaken. From the financial analysis, it is evident that the company has performed poorly in 2019 and 2020. Worst still, it is projected that the company will perform poorly in 2021 as it recovers from the impacts of Covid-19. In terms of cash flows, the company’s flow of cash is declining while the net profits are also decreasing. The total assets are decreasing while the total liabilities are increasing. Moreover, the EV, EV/ EBITDA, PE, and market capitalization are decreasing. Furthermore, the company’s share prices are decreasing from 60.37 in January 2020 to 29.64 in August 2020. However, the NPV, DFC, and IRR have shown that the company is valuable and attractive for an investor. Indeed, the basic rule in stock market is to buy shares when the prices are low and sell them when the prices are high. BUYING Shell shares now means that an investor will sell then at almost 300% post coronavirus.

P/E is a valuation ratio that shows what the investors are willing to pay for the company based on the past trend of the shares. Investors use P/E to determine the relative share of the company based on apples-to-apples comparison. A higher P/E means that a company is over-priced hence investors are expecting high growth rates from the firm. Going back to our analysis, Shell Oil has the second highest P/E compared to its rivals in the sector (only Exxon Mobil is above it). Therefore, investing in Shell’s share means that the investigator will be expecting to have value addition on his or her investment.

Price/Book Value” Ratio (P/BV) on the other hand, is a financial ratio that is used to compare the firm’s market capitalization in relationship to its book value. In other words, P/BV measures how well a company can improve its book value. P/BV below 1.0 is considered a solid investment. Consequently, going back to the industry’s analysis, it is evident that Shell Oil’s P/BV is solid (0.83) even though it is not the most solid in the sector. Nonetheless, it can be argued that investing in the company’s stock is justified. Enterprise value/EBITDA is also an important valuation tool that compares company’s profitability before making investment decisions. Typically, an Enterprise value/EBITDA ratio below 10 is seen as healthy. Shell’s EV/EBITDA is at 1.55 meaning that the company is in a healthy financial position. Finally, it is paramount to consider the profitability of the firm in the sector. Comparing with the firm’s in the sector, Shell has the lowest net income. Nonetheless, net income alone cannot determine results unless compared with the returns per share.

However, the investigation faced various challenges. For example, in chapter 3 and 4, the investigator faced the challenge of identifying trustable sources of information. Another challenge was limitation in analyzing large data such as balance sheet and statement of income. Nonetheless, the dissertation was an opportunity to learn how to conduct a conclusive analysis of a company. In making the recommendation to BUY the company’s shares the investigator was driven by the prevailing conditions (covid-19), the need to buy many shares, and the future of industry post coronavirus. The knowledge learned will help the investigator in undertaking future analysis and determining the worth of a share in a given company. Moreover, this dissertation will add to the body of knowledge in the sector to be used by other users.


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About the Author Tony Armstrong

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