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Here’s what a FTSE 100 exit could mean for the Shell share price

The flag of the United States of America flying in front of the Capitol building
Image source: Getty Images

Currently above £28, the Shell (LSE:SHEL) share price trades within a few percentage points of a record high. The oil and gas giant is the FTSE 100 index’s largest company measured by market cap, valued at a whopping £182.4bn today.

However, Shell’s days as a FTSE 100 stock could be numbered. In recent days, Chief Executive Wael Sawan has mentioned the idea of abandoning a London Stock Exchange listing in favour of New York.

So, why might the firm consider such a move and what might the implications be for its share price?

Let’s explore.

Valuation concerns

The primary motivation behind a Shell move to the New York Stock Exchange would appear to be a feeling that its UK listing is damaging the company’s valuation.

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A glance at the valuations of oil stocks on both sides of the Atlantic lends credence to these fears. Using their forward price-to-earnings (P/E) ratios as a gauge, Shell and BP trade at a discount compared to similar US companies, such as Exxon Mobil and Chevron.

Stock

Forward P/E ratio

Shell

9.03

BP

7.62

Exxon Mobil

12.97

Chevron

12.38

The outperformance of US stocks in recent years over UK shares hasn’t been confined to the energy sector. The S&P 500 has eclipsed the FTSE 100’s returns by a considerable margin.

With a greater number of potential investors, a deeper capital pool to tap into, and arguably a more pro-business environment, it’s easy to see why an American listing could be an attractive option.

Factors such as Brexit and domestic political instability have acted a drag on UK stocks as a whole. These are headaches that Shell might rather avoid.

Ultimately, a US move could possibly boost the Shell share price if it translates into more investment in the firm. Undoubtedly, this would please shareholders.

A change of strategy?

There are potential strategic reasons behind a possible relisting too. UK regulations on ESG standards are generally seen as stricter than those in the US. This is a critical consideration for a business that relies heavily on fossil fuels for its revenue.

Last month, Shell softened its energy transition targets to reduce its carbon emissions. It’s now pursuing a 15%-20% reduction by 2030, compared to a previous aim of 20% specifically.

Perhaps the board’s thinking runs deeper than the valuation alone. If Shell’s ambition is to slow down its green transformation even further, a US listing would make sense.

Such a change of strategy could have a material impact on the future direction of Shell’s share price. Although higher profits would be the rationale, it exposes the company to the risk of losing investor confidence due to a lack of consistency.

Furthermore, it might increase the likelihood of climate-focused lawsuits being brought against the company. After all, Shell’s no stranger to environmental litigation in the present day.

Still a FTSE 100 stock for now

It’s important to note that nothing is confirmed and a move may not materialise. Investors seeking to capitalise on a potential relisting would be wise to bear this in mind.

Nonetheless, I believe Shell shares merit consideration from those who want exposure to the oil and gas sector, whether they’re part of the FTSE 100 or not.

The post Here’s what a FTSE 100 exit could mean for the Shell share price appeared first on The Motley Fool UK.

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Charlie Carman has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024