Rotterdam – With the chemical industry performing strongly, I am curious about the current state of Shell, which will publish its third-quarter results on 29 October. As one of the world’s five largest international energy and petrochemical companies, Shell remains the third-largest by market capitalization, comfortably ahead of TotalEnergies and trailing only the American giants Chevron and Exxon Mobil.
However, a closer look at Shell’s price-to-earnings ratio reveals that investors currently have significantly less confidence in the company than they do in its American peers or even BP. Below, we examine why investors appear more cautious about the future earnings growth of the Anglo-Dutch energy major.
523 words | 3-minute read
Price-to-Earnings Ratio
A price-to-earnings (P/E) ratio of around 12 means investors are willing to pay twelve times Shell’s annual earnings for a share of the company. For Exxon Mobil, Chevron and BP, that figure is roughly twice as high.
| Company | Symbol | P/E Ratio (TTM) | Market Capitalization |
|---|---|---|---|
| Exxon Mobil | XOM | 23.75 | $758.73 billion |
| Chevron | CVX | 22.23 | $458.11 billion |
| Shell | SHEL | 11.90 | $308.00 billion |
| TotalEnergies | TTE | 12.05 | $213.38 billion |
| BP | BP | 24.37 | $134.23 billion |
The European Discount
European oil and gas companies such as Shell, TotalEnergies, BP and Eni consistently trade at lower valuations than their American counterparts. This “European discount” reflects stricter climate regulations, higher carbon costs and stronger political pressure in densely populated Europe.
Europe has approximately 74 to 75 inhabitants per square kilometre, compared with just 34 to 35 in the United States. The Netherlands, with around 433 inhabitants per square kilometre, ranks among the most densely populated countries in the world. As a result, industries often perceived as environmentally burdensome tend to receive significantly lower valuations in Europe than in regions with lower population density.
A Strategic Balancing Act
Investors have long questioned how Shell should finance the energy transition. While the company continues to generate billions in profits from oil production, LNG and refining, it has also invested heavily in renewable energy projects over the past decades, many of which offer lower returns than its traditional businesses.
Under CEO Wael Sawan, Shell has scaled back a large number of sustainability initiatives and shifted its focus towards profitability and shareholder returns. Yet uncertainty remains. Investing too heavily in low-return renewable projects can undermine earnings, while investing too little risks political opposition, regulatory pressure and reputational challenges.
A Cyclical Industry
The nature of the energy sector itself also weighs on valuations. Investors understand that today’s profits are heavily dependent on oil and gas prices. Should geopolitical tensions ease and energy prices decline, earnings across the sector could come under pressure relatively quickly.
Equity markets therefore focus primarily on future earnings potential and increasingly assume that oil prices may trend lower over the long term, despite periodic spikes caused by geopolitical events.
Bargain or Value Trap?
The key question remains whether Shell is genuinely undervalued or whether its modest valuation accurately reflects the uncertainties facing European energy companies.
We may have a clearer answer when Shell reports its third-quarter results on Thursday, 29 October. The update may also provide greater clarity on the company’s plans for the ageing and loss-making refinery facilities in Pernis.