When Wael Sawan became CEO of Shell (LSE: SHEL) in January 2023, he highlighted how its share price had suffered compared to its fossil-fuel-focused competitors.

Shortly after, the oil and gas giant adopted a more pragmatic approach to its previously uncompromising energy transition strategy.

It reduced its net carbon cut by 2030 from a minimum 20% to 15% compared to 2016 levels. Additionally, it scrapped its 45% net carbon reduction target for 2035, while remaining committed to a 100% reduction by 2050.

However, it pledged to keep oil production at 1.4m bpd until 2030. And it promised to expand its liquefied natural gas (LNG) gas business based on forecasts that demand will increase 50%+ by 2040.

Shell already has major LNG projects in 10 countries. And it has access to around 38m tonnes of its own LNG capacity from 11 liquefaction plants.

That said, a major valuation gap with its key US and Saudi Arabian fossil-fuel-focused peers persists.

How undervalued are the shares?

On the price-to-earnings ratio Shell trades at just 12.6. This is bottom of its group of competitors, comprising ConocoPhillips at 13.1, ExxonMobil at 14.2, Chevron at 15.6, and Saudi Aramco at 16.3.

So, Shell looks very undervalued on this basis.

The same is true on the two other ratios I most rely on – price-to-book and price-to-sales. On the former, Shell is at 1.1 against a 2.7 peer average. And on the latter it is at 0.7 compared to an average of 2.2 for its competitors.

To translate these undervaluations into share price terms, I ran a discounted cash flow analysis using other analysts’ figures and my own.

This shows Shell shares are 42% undervalued at their current £26.46 price. So the fair value for them is technically £45.62.

They may go lower or higher, depending on market vagaries. But it underlines to me how cheap they may be right now.

Potential catalysts for an upward revaluation?

Shell has focused on expanding its fossil fuel production in recent months to try to close this valuation gap.

Most recently, 9 January saw it begin oil production at its Gulf of Mexico ‘Whale’ facility. This has estimated recoverable reserves of 480m barrels of oil equivalent (boe). Forecast peak production is 100,000 boe per day (boe/d).

January also saw CEO Sawan meet with Iraq’s Prime Minister Mohammed al-Sudani to underline Shell’s readiness to increase its investments in the country. Along with Saudi Arabia and Iran, Iraq has the cheapest oil in the world to produce at just $1-$2 per barrel.

On 15 December, Shell additionally agreed to begin production at the giant Bonga North deep-water project off the coast of Nigeria. It has estimated recoverable reserves of 300m+ boe and will reach peak production of 110,000 boe/d.

Will I buy more shares now?

A risk for the stock is that oil and gas prices switch into a long-term bearish trend. That said, analysts forecast its earnings will grow 7.4% each year to end-2027. And it is these that ultimately drive a firm’s share price higher.

Consequently, I will be adding to my existing Shell holding very soon.