Why I remain bullish on the Shell share price

I have always been a firmer believer that truly outsized returns in the stock market come by taking a contrarian stance. Three years ago, when the price of oil became negative and many advocated the demise of shell (LSE:SHEL), I started to build a position. Since the stock price has been rising steadily since the dark days, I have not made any profit. However, I have continued to buy them.

Record cash flow

In its full year results, Shell reported excellent numbers. Revenue reached $361bn, with contributions from every segment. The most prominent player is natural gas, which generated an 80% increase in revenue.

Adjusted earnings more than doubled to $39.9bn. Cash flow from operations (CFFO) is another key metric. Shell’s policy is to return at least 35% of CFFO to shareholders. As this figure increases by 52% in 2021, the total shareholder returns will be $26bn.

The dividend has increased 15% to $0.2875 per share. The dividend yield is equal to 3.9%. In addition, it has announced a $4bn share buyback program.

Structural trends

Right now, we have one of the most reckless energy policies in history. Many blame the war in Ukraine for driving prices higher. While there is a lot of truth, it does not tell the full picture.

I believe that the days of cheap energy are gone. In the short term, oil prices appear to be oversold. First, there is the reopening of China, the world’s largest oil importer. Second, the US government began to reverse its policy of dumping strategic petroleum reserves on the market.

One of the biggest mistakes I think many analysts make is using the 2008 playbook to determine the probability of oil prices.

During the global financial crisis, oil reached $150 per barrel. When the world went into recession, the price of oil fell.

Today, the recession appears to be almost over. Surely, then, the oil must go south? I believe not. The reason is simple. Since the shale boom in 2014, the industry has experienced chronic underinvestment.

Just take one piece of evidence. In a five-month rolling average, the latest total of oil and gas rig operations in the U.S. has shown a sharp decline by the end of 2022. Supply is already limited.

Risk

The risks of investing in Shell are well known. One has to do with whether the world has passed, or is about to pass, peak oil. If so, the company will be left with some stranded assets.

Over the course of several decades, the world will slowly transition away from hydrocarbons as the primary source of energy. Renewable energies like solar and wind will certainly become a bigger part of the generation mix. My problem is that the technology here is very young.

By accelerating the move away from oil before we have a stable and reliable source of energy to replace it, is one of the reasons why we are in the mess we are in today.

This is why I believe Shell will continue to grow for many years to come, and why I continue to add shares to my portfolio when finances allow.