Shell's dividends back to the future on strong oil prices

After ‘retiring’ its $65bn (£47bn) net debt target earlier in the month, Royal Dutch Shell (RDSB) set dividend klaxons blaring, especially as the oil price remained over $70 a barrel (bbl). 

It has delivered, boosting the quarterly pay-out 38 per cent to 24¢, on top of $2bn in buybacks that will be completed in the second half. The turnaround on last year, when the oil price crashed and Shell cut thousands of jobs globally, has come as Brent crude bounced back to stay above $50/bbl all year. Recent Opec-plus drama has kept the price high despite worries over the Delta-variant of Covid-19 hitting demand. 

Shell’s adjusted profit jumped 71 per cent between the June and March quarters this year, coming in 10 per cent above analysts’ consensus estimate at $5.5bn. 

Chief executive Ben van Beurden said the company’s “operational and financial delivery and strengthened balance sheet” had led the board to rebase the dividend to 24¢ a quarter. Management is facing a fight to roll back tough emissions targets set by a Dutch court earlier this year, which the major would need to sell off assets to meet. 

The chief executive said Shell was “moving at pace” towards its net zero goals, which are weaker than those of others in the sector. This week, the company announced a final investment decision for the 100,000 barrels of oil per day Whale project in the Gulf of Mexico. 

Underlying cash profits for the quarter on a current cost of supplies basis (CCS) - Shell’s preferred profit measure - climbed almost a fifth to $13.5bn. This was up a quarter for the half, showing the turnaround on last year. The upstream division drove this strong performance, with its $2.5bn in adjusted earnings a quarter ahead of expectations. 

Despite the retirement of the $65bn goal, below which Shell said it would increase shareholder distributions, the company got very close. Net debt was $65.7bn at 30 June. 

Earnings will likely remain strong for the rest of the year as long as oil prices remain buoyant, although oil and gas production will drop in the September quarter, with upstream production guidance set at 2.1-2.25m barrels of oil equivalent a day (boepd) compared to the June quarter’s production of 2.26mboepd. 

French major TotalEnergies (Fr:FP), also reported June quarter profits ahead of expectations at $3.46bn in adjusted net income, 5 per cent above consensus. 

Jefferies analyst Giacomo Romeo tempered expectations on Shell’s pay-out increases being repeated as other oil and gas giants report in the coming weeks. “Shell has the highest shareholder remuneration upside potential among the supermajors,” he said. 

There is a broad view that the Dutch court decision, which ruled Shell had to cut its emissions by 45 per cent by 2030, will get watered down on appeal, given the oddity of governments forcing individual companies to change, but it has prompted important questions over emissions stewardship and the increasingly interventionist role of the courts. Answers will become clearer if Shell's appeal fails. 

The industry is in a state of flux but investors are reaping the rewards of the oil bounce-back. We are still bearish on Shell in the long-term, however. Sell.

Last IC View: Sell, 1,353p, 27 May 2021