I. Why this post exists
In my previous post on Shell I valued the company at 13 June 2025, ran four methods in parallel, and ended with a Kennedy refrain handing the decision over to the reader. The post stopped at a buy-decision built on a 55.9 % probability of underpricing in the base run, with the explicit thesis that the next leg up would come from fundamentals rather than from a higher Brent print. It did not commit to anything beyond that. The honest thing to do – eleven and a half months later – is to come back and check.
The window is unusually clean. On 2 March 2026 a major geopolitical incident around the Strait of Hormuz spliced the observation period into two regimes – a quiet, fundamentals-driven stretch from 13 June 2025 to 27 February 2026, and a shock-driven stretch from 2 March 2026 through (so far) 26 May 2026 – twelve weeks long enough that the shock half is now meaningfully bigger than a single news cycle. That accidental split is the kind of natural experiment a valuation methodology rarely gets in clean form: a calm regime to test the fundamental layer of the model, a shock regime to test the option layer.
II. What was on the table at 13 June 2025
A quick recap, for readers who didn’t see the June post.
At the valuation date Shell traded at $36.25 per share on the article basis. I applied four methods in parallel, each yielding a per-share number on a consistent share count:
• Fundamentals normalisation – baseline (cycle-median revenue × 8 % operating margin): $26.50. The 8 % was the 2010–2024 cycle-median operating margin; the revenue side was the cycle-median top line over the same window. On its own logic, Shell looked overpriced.
• Fundamentals normalisation – conservative (cycle-median revenue × 10 % operating margin): $42.16. I called the higher margin conservative precisely because the company was already earning above 11 % and management had given no sign of reversal. On its own logic, underpriced.
• Oil-price normalisation: $41.68 at the spot of $73, $44.09 at the cycle-median $75.85, with a middle of $42.89. Underpriced.
• Monte Carlo with correlated Brent and operating-margin draws (100 000 trials): median $40.50; 5th–95th percentile range $25.50–$64.30; 55.9 % of the mass above market. Underpriced on median.
Four anchors, not one. The fundamentals baseline at $26.50 was deliberately the cheap stress test – it asks what Shell would be worth if its sustainable operating margin reverted from the 11–14 % range it had been printing back to the 2010–2024 cycle-median 8 %, i.e. if recent above-cycle profitability were treated as a temporary tailwind rather than a sustainable level. The other three methods clustered between $40 and $44. I bought at $36.25 with the explicit thesis that the next leg up would come from fundamentals – sustained margin above the cycle median, the buyback, the rising payout ratio – rather than from a higher Brent print.
III. The window, the regimes, the gap that closed
Between 13 June 2025 and 26 May 2026 the share price rose 18.3 % on the consistent article basis, from $36.25 to $42.88. Brent ran the opposite way through the calm half of that window – from $76.00 on the valuation date down to $71.32 on the eve of the shock, or –6.2 % and then broke regime on 2 March. The first half of the window is the cleaner test: the re-rating happened despite weak oil, not because of it.
Splitting the window at the day before the Hormuz shock sharpens the point. In the pre-shock regime, from 13 June 2025 to 27 February 2026, Shell rose 15.1 % on basis – almost the entire long-run gap to the methods that had said underpriced closed in nine months on a falling Brent. The share price crossed the Monte Carlo median ($40.50) on 25 February 2026, the lower edge of the oil-price normalisation band ($41.68) on 27 February 2026 – literally the eve of the shock – and the conservative fundamental ($42.16) and the oil-price middle ($42.89) on 6 and 11 March 2026 respectively. None of those crossings coincided with Brent above $75. The market re-rated Shell to its intrinsic-value range on the strength of fundamentals, before there was any extra geopolitical premium to allocate.
Picture 2. Monte Carlo distribution of Shell’s intrinsic value (100 000 draws, log-normal calibrated to the June 2025 paper). Markers show where the realised price sat at three reference dates: the valuation date, the eve of the shock, and today.
Then came 2 March 2026. Brent indexed to the valuation date jumped from 94 to a peak of 182 – close to a doubling off the week before. Shell on the same index moved from 115 to a post-shock peak of 130 on 7 April 2026, then drifted back to 118 by 26 May as Brent receded from its peak. That is a striking asymmetry: an almost doubling in spot Brent delivered, at peak, fifteen index points on top of a share that had already re-rated by fifteen – and most of that incremental fifteen has since unwound while Brent is still trading around 155. The interpretation is straightforward once we sit with the model. The bulk of Shell’s value sits in already-producing assets whose discounted cash flows are not very sensitive to a one-quarter spike in spot Brent. The option layer on undeveloped reserves – Whale, Bonga North, Manatee, the rest – is the only piece of the valuation that should react to a regime change in oil-price volatility, and it did, but in measured size, and only for as long as the volatility regime itself looked changed.
Picture 3. Shell daily close (article basis) against the three near-money valuation anchors – Monte Carlo median, conservative fundamental, oil-price middle – with the Hormuz shock dashed in. The stress-test anchor (Fundamentals 8 % at $26.50) sits below the plotted range.
IV. Reading out each method against eleven months of price tape
Picture 4 below plots the mean absolute deviation of the realised price from each method’s central anchor, separately for the two regimes. The ranking is informative because it inverts.
Picture 4. Mean absolute deviation of realised price from each method’s central anchor – pre-shock regime (green) versus post-shock regime (orange). Computed from daily Shell article-basis prices, 13 Jun 2025 – 26 May 2026.
a. Pre-shock regime (the fundamental period). Monte Carlo wins (MAD 9.4 %). The conservative fundamental at 10 % margin is a close second (12.9 %). The oil-price normalisation comes third (14.4 %). The fundamentals baseline at 8 % is last by a wide margin (38.6 %) – which confirms what was already obvious in June: an 8 % anchor is artificially low for a company already earning above 11 %.
b. Post-shock regime (the geopolitical period). The ranking flips. Oil-price normalisation is now the most accurate (MAD 4.2 %) – intuitively correct, because that method is the one explicitly tied to where oil prices sit. The conservative fundamental holds up unexpectedly well (5.4 %), because the margin anchor turned out to be the right long-run anchor regardless of regime. Monte Carlo is third (9.5 %), barely worse than its pre-shock score; the reason it loses any accuracy at all is that the empirical 2005 – mid-2025 Brent distribution simply did not contain prints above $130, so the realised path strayed outside the bulk of the simulated distribution. The fundamentals baseline at 8 % is again last and by a much wider margin (67.4 %), because the share price kept walking away from a value anchor that was wrong to begin with.
The cross-regime lesson is the central takeaway of this retrospective. No single method dominates in both states of the world. Monte Carlo is the right tool when the market is weighing fundamentals; oil-price normalisation is the right tool when the market is reacting to a price shock; the conservative fundamental is a useful sanity check across both; and the baseline at the cycle-median margin is mostly a stress test that tells us what Shell would be worth if everything we knew about its recent operating performance were wrong. The right output is the range the four methods jointly span, not any one anchor on its own.
V. The option layer, an area to keep exploring
In the June post I priced Shell’s undeveloped reserves as a portfolio of European call options on oil, using Black-Scholes with q = 1/n to penalise time-to-expiry. That layer added a non-trivial premium to the producing-asset DCF. A few fellow financiers reasonably asked whether the option layer was doing real work or just decorating the model with mathematics.
Let me be precise about what the option-pricing model actually tells us. Black-Scholes is unambiguous on direction: higher realised volatility raises the value of a long-dated call, and lower volatility releases that premium back. Between 2 March and roughly the second week of April 2026 Brent’s realised volatility jumped sharply, then started normalising; over the same window Shell traced a path from $42 to a peak around $47 article basis on 7 April and back toward $43 by 26 May. The option layer must have contributed something to that round trip – the model leaves no room to claim otherwise. What I am not ready to tell you is how much. Disentangling the option-layer contribution from the producing-asset DCF response inside a single shock episode is its own piece of work; I treat it as an open area for further exploration, not a question I have answered here.
VI. The Graham line, eleven months late
Benjamin Graham’s observation about the market being a voting machine in the short run and a weighing machine in the long run gets quoted often enough that it has nearly worn itself out. The Shell window is a rare clean example of what he meant. In the nine months before the shock there was no news on oil that should have re-rated Shell by 15 % – Brent went down over that period. What changed was that the market progressively recognised what the four methods had already weighed in June: that Shell’s sustainable operating margin was closer to 14 % than to 8 %, that the buyback was real, that the reinvestment rate was settling at a level consistent with a mature commodity producer returning more cash than it deployed. The market weighed. Then geopolitics arrived and the market voted – briefly, on volatility – in a direction broadly consistent with what an option-pricing layer would predict, before giving most of the incremental premium back as volatility eased. The producing-asset DCF carried the underlying value through both halves.
VII. And so, dear friends, you just have to carry on
The cleanest evidence sits in the calm half of the window, not the loud half. By 27 February 2026, the eve of the Hormuz shock, Shell had already crossed the Monte Carlo median ($40.50), touched the lower edge of the oil-price normalisation band ($41.68), and was within striking distance of the conservative fundamental ($42.16) and the oil-price middle ($42.89). On a falling Brent. The market closed the gap between $36.25 and the band the four methods jointly defined while spot oil drifted from $76 to $71. That is the part of the test the Iran shock did not run for me: it had already finished, in my favour, before the first headline out of Hormuz.
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