Shell Plc (SHEL) stands out as a cheap oil and gas stock that value investors should not ignore. It trades at a significantly lower P/E multiple than its US counterparts.  

The stock trades for 5.2x for this year based on an earnings per share (EPS) estimate of $10.63 for 2022 and 6.0x for next year. This is well below what other energy stocks trade for. 

This is based on 13 analysts' estimates surveyed by Seeking Alpha. Other estimates show even higher earnings. 

For example, Barchart projects that 2022 earnings will reach $11.41, putting the stock on a 2022 multiple of just 4.87x at today's price (Aug. 29) of $55.59.

This is also significantly lower than its peers in the energy industry. For example, Exxon (XOM) trades on a forward P/E multiple of 7.7x for 2022 and 9.3x for 2023. As one analyst points out, Shell Plc is subject to the same exposure to oil and gas prices as Exxon. So there is no fundamental reason why it should be at such a discount.

As a result, SHEL stock could rise significantly, up to 47% should its valuation reach the same multiple. For example, at 7.7x earnings times $10.63 EPS estimates for 2022, the stock could be worth $81.85 per share. That is 47% over today's price.

Undervalued Dividends

Moreover, Shell's 3.60% dividend yield is very attractive. This is based on a quarterly dividend of 50 cents per share. It is well above its historical average of 1.34% in the past 4 years, according to Seeking Alpha. That is a difference of 2.26%.

So, for example, even if the yield would move to half of that distance, to say 2.50%, the stock price would rise significantly. This can be seen by dividing the annual $2.00 dividend by 2.50%. 

That results in a target price of $80 per share (i.e., $2.00/0.025 = $80.00). That represents a potential upside in SHEL stock of 43.9% from today's price of $55.59 per share.

Shell - Investor Relations

Where This Leaves Investors In SHEL Stock

Based on P/E multiple valuations, SHEL stock should be at $81.85. And based on a dividend model the stock should be at $80 per share. As a result, the average price target is $80.93, or 45.6% over today's price.

Moreover, Shell has been buying back large amounts of its stock shares. That activity serves as a major catalyst pushing the stock higher. 

For example, on July 28, the company announced a $6 billion share buyback program that it expects to complete by the end of Q3. Given its $199 billion market cap, that represents a 3.0% reduction in its share capital during a three-month period.

Investors will be keen to see what further share buybacks the company announces during its Q3 earnings release.

The bottom line is that even the company's board recognizes that its share price is too cheap. 

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