As the entire market faces geopolitical instability, Shell plc (SHEL)Like other large integrated oil companies, it has benefited from high oil prices and deserves investors’ attention.
Despite the double blockade by both Iran and the US currently disrupting the Strait of Hormuz – the most significant energy supply disruption in modern history – Shell’s integrated model and large trading arm are positioned to grow. Even if ongoing negotiations lead to a detente, the logistics logjam will take several quarters to clear as energy prices remain structurally supported, not to mention the need to replenish strategic oil reserves. The world is now being reminded of the importance of insurance policies.
For investors looking to capture yield from this environment, I target moderately bullish income strategies.
Trade: Cash-Secured Short Put
The effective closure of the Strait of Hormuz since late February has removed millions of barrels from daily global supplies. While diplomatic efforts are underway, ship insurance remains at prohibitive levels. This “longer higher” pricing environment for Brent crude has a direct impact on Shell’s upstream and integrated gas margins.
Even a “peace pivot” will not immediately replenish global stocks and provide a solid foundation for stock prices.
The company just completed its latest $3.5 billion stock repurchase program, effective May 1. Given the high free cash flow (FCF) generated by the high realized price, management is widely expected to announce new share buybacks in upcoming earnings calls. Combined with the dividend yield, which currently hovers around 3.2%, the return on total capital is one of the strongest in the sector.
Shell, YTD
Shell will announce its financial results this Thursday, May 7th. Earnings events often cause volatility in the tech industry, but SHEL has historically been a stock that has helped me sleep better at night. On average, stock prices move only 2.7% the day after release. By selling the 85-strike put, we are positioned well below current trading levels and have a significant “margin of safety” even if the market reacts poorly to the headline number.
Shell’s forward P/E ratio is approximately 8.7x, which is not priced to account for current cash generation realities. By selling the June 85 put, we are essentially betting that massive share buybacks and global energy shortages will prevent a significant decline and allow us to pocket a $1.75 premium for a high probability of double-digit annualized returns.
