Shell: Market Is Too Bearish On Diversified Energy Strategy (NYSE:SHEL)

The EV-Advertising Investment Thesis Is Interesting

Overlap Of Volta’s Charging Network Over Shell’s Existing Gas Station

There might be operational synergies in Shell’s (NYSE:SHEL) acquisition of Volta (VLTA), attributed to the notable overlap in their geographical density in the US, beyond the obvious EV charging offerings. By January 24, 2023, there were 12.46K of Shell gas stations within 51 states and 4.07K cities. At the same time, VLTA boasted up to 2.99K of EV charger locations nationwide.

The interesting thing about the VLTA platform was that it also offered a network of over 5.7K digital screens located in high-traffic locations, such as big box stores, shopping malls, movie theaters, and theme parks. The dual EV charging and media network strategy made it an efficient and mutually beneficial idea, especially since charging on the platform was free and supported by the ad revenues from renowned brands such as Netflix (NFLX), Starbucks (SBUX), and Anheuser-Busch (BUD), amongst others.

Notably, the charging platform was often sponsored by supermarket chains, such as Kroger (KR), Albertsons (ACI), Walgreens (WBA), and Stop&Shop, while Costco (COST) opted to directly partner with third-party providers, SemaConnect, Walmart (WMT) with Electrify America, and Target (TGT) with ChargePoint (CHPT) and Tesla (TSLA).

This built on the trend of big-box retailers, such as COST and WMT, adding gas stations to their offerings to attract consumers and improve membership growth. Based on the fuel price tracking app, GasBuddy, these retailers continued to offer one of the lowest gas prices nationwide, which helps explain why the segment comprised a notable 13.6% of COST’s 2022 revenues.

Therefore, the strategic model made a lot of business sense for these retailers, since the low-cost gas/ free EV charging might bring critical foot traffic, while similarly boosting sales in other segments.

SHEL Has A Diversified Approach Towards An Electrified Future

Now, how would this play out for SHEL? The VLTA acquisition may further decentralize its EV charging offering beyond the existing gas station locations. It also built upon its previous acquisition of ubitricity, which allowed consumers to charge their vehicles through on-street EV charge/ lamp posts in the UK and the Greenlots acquisition in the US, a company offering EV charging operating platform, notably used by Electrify America as well.

At the time of writing, SHEL already had existing partnerships for EV charging points at select supermarket locations such as Aldi and Waitrose locations in the UK and Tesco in Hungary. This was on top of converting one of its existing gas stations in London, to an EV-only charging hub with a cafe, supermarket, and free wifi. The company would also be installing EV charging points in various parking lots located in residential areas in Singapore.

Notably, SHEL collaborated with NIO (NIO) for an integrated power charger and swap stations in the EU and China, while similarly acquiring an 80% stake in BYD‘s (OTCPK:BYDDF) Electrically-Powered Automotive Investment unit. It was important to note that BYD was the largest EV [BEVs and PHEVs included] manufacturer globally by volume, with 1.86M (+208.6% YoY) sold in 2022, compared to TSLA’s 1.31M (+40% YoY) at the same time.

While VLTA’s model had yet to be profitable, we reckon this was not an issue for SHEL, since the oil giant boasted deep pockets with $35.97B of cash/ equivalents and $437.3B of assets as of the latest quarter.

We must also highlight that CHPT had yet to achieve break-even, with gross margins of 17.8% and EBIT margins of -85.6% over the last twelve months. However, with market-leading 210K network ports globally, it was unsurprising that the company had prioritized market share growth over profitability for now.

We reckon that it may be important for SHEL to similarly embark on an aggressive land grab approach, especially since the number of EVs on the roads globally is expected to expand tremendously from 16.5M in 2021 to 350M by 2030, at a CAGR of 40.41%.

So, Is SHEL Stock A Buy, Sell, or Hold?

VLTA 2Y Stock Price

We think SHEL made the right decision in buying out VLTA at $0.86 per share, with the latter having lost -97.9% of its value from the peak stock price of $15.03. In our opinion, the oil giant has done well with this particular deal, as it expands its renewable energy ambitions at an opportune time when VLTA is suffering from cash burn issues.

SHEL 1Y EV/Revenue and P/E Valuations

In the meantime, SHEL is currently trading at an EV/NTM Revenue of 0.71x and NTM P/E of 5.96x, lower than its 3Y pre-pandemic mean of 0.98x and 12.60x, respectively. Otherwise, it is still lower than its 1Y mean P/E of 5.64x.

SHEL 5Y Stock Price

Based on SHEL’s projected FY2024 EPS of $8.16 and current P/E valuations, we are looking at a moderate price target of $48.63. This offers a minimal upside potential to the current share price of $58.32, since the stock has also recovered by 24.6% since hitting the bottom in September 2022.

On the other hand, we are more bullish, since we expect an upward rerating in SHEL’s P/E valuations nearer to the normalized levels of 9.5x, against its peers’ mean of 11.08x. The market is naturally pessimistic about the diversified renewable approach, especially due to the reduced capex toward oil exploration. We expect market sentiments toward SHEL to improve moderately once the global EV movement gains traction and more EV peers achieve profitability, speculatively by 2024 or 2025.

Based on the revised P/E, we may see SHEL achieve an aggressive price target of $77.52 instead, suggesting a 32.9% upside potential from current levels. As a result, investors with higher risk tolerance may still consider nibbling here. Naturally, portfolios should also be sized appropriately, since the macroeconomic outlook remains pessimistic in the short term.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.