This article first appeared on GuruFocus.
Shell (NYSE:SHEL), the global oil and LNG giant, delivered a monster second quarter and now oil prices are giving investors another reason to pay attention. U.S.-traded shares gained roughly 1.1% Monday as Brent crude ripped more than 3% higher to around $86.11 per barrel. Iran is still putting conditions on reopening the Strait of Hormuz, keeping a geopolitical premium alive in oil. After crude was hammered last week, the rebound changes the setup quickly. For Shell, every sustained move higher in oil can pour more fuel into an already powerful cash machine.
And this cash machine is humming. Adjusted earnings exploded to $9.84 billion from $4.26 billion a year ago. Operating cash flow reached $21.4 billion. Free cash flow landed near $17.5 billion. Net debt plunged to $41.8 billion from $52.6 billion sequentially. Shell is turning that firepower straight back toward shareholders, adding $3 billion of fresh buybacks on top of roughly $1.2 billion remaining from its previous program.
Shell Stock Rises as Hormuz Doubts Push Oil Higher · us.finance.gurufocus
But here is the catch: the stock is no longer cheap by GuruFocus’ GF Value yardstick. Shell traded at $89.59 on Aug. 10 versus a GF Value estimate of $79.76, putting the shares 12.32% above GF Value. The market is already pricing in plenty of good news.
Now it comes down to execution. Shell’s $17.5 billion of quarterly free cash flow was more than three times its $5.2 billion dividend payout and completed repurchases. That is serious financial muscle. If crude stays around these levels or pushes higher Shell could have even more room to crush debt and keep buying stock. But investors should not chase the oil spike blindly. LNG availability, trading results, working-capital swings and the ARC Resources acquisition can all hit cash flow, while any breakthrough over the Strait of Hormuz could knock the geopolitical premium out of crude almost overnight. Shell has the earnings. It has the cash. It has the buybacks. At 12.32% above GF Value, though, it also has something it did not have before: a higher bar to clear.