Bumper earnings for Shell after transition year

Shell (SHEL) has roared back to strong profitability in 2021, with the December quarter’s adjusted earnings eclipsing full-year figures for 2020. 

After a year of major changes, including a new unified share structure and the $9.5bn (£7bn) sale of its Permian assets, the company has delivered a major profit increase in Q4 and will now ramp up its buyback programme, while raising the pay rate for the first quarter of 2022 by 4 per cent to 25¢ a share. A $8.5bn buyback goal for the six months to June 30 means the quarterly spend will be $1.5bn, outside of the remaining $5.5bn to be handed back from the Permian sale. 

Shell joins US giants ExxonMobil (US:XOM) and Chevron (US:CVX) in upping investor payouts amid the oil and gas resurgence from this year. 

But chief executive Ben van Beurden said the company was still focused on cutting its emissions despite the resurgence of oil and gas prices. “We delivered very strong financial performance in 2021, and our financial strength and discipline underpin the transformation of our company,” he said. 

Van Beurden did say the commodity market volatility that helped drive the outsize earnings was not ideal, even for Shell: “We’d much prefer stable and steady market development, rather than the one we are experiencing at the moment [which is] much like a rollercoaster.” 

He went on to add that a lack of investment in exploration and development in “lean years” on top of public energy companies cutting investment in new projects had meant the industry had struggled to keep up with supply demands in the past year.

Hours after Shell announced its bumper profits, the UK energy regulator Ofgem officially raised the energy cap to almost £2,000 a year, a £693 increase, in response to retailers going under due to extremely high wholesale power prices.

Adjusted earnings for 2021 were $19.3bn, compared to $4.8bn in 2020, while in the December quarter the company hit adjusted earnings of $6.4bn, a 55 per cent increase on the previous quarter. Shell also announced a much-reduced debt pile compared to a year ago, with net debt down almost a third to $52.6bn. 

Integrated gas earnings were the largest contributor, unsurprisingly given the rise in realised gas prices to $9.80 per thousand cubic feet (mscf) from $4.33/mscf a year ago. The division reported $4bn in adjusted earnings, compared to $1.1bn a year ago. 

Shell’s cash flow from operations before working capital adjustments beat analyst expectations by 5 per cent despite a $2.7bn hit from derivatives contracts. Jefferies analyst Giacomo Romeo called the December quarter numbers a “strong delivery on all fronts”. 

Spending was at the low end of expectations in 2021, at $20bn. The company said it would aim to hit the same level this year, within the range of $23bn-$27bn. 

For investors, the green energy space has come off the boil in recent months but for Shell and its energy cohort projects remain expensive: last month’s winning bid for 5 gigawatts (GW) of offshore wind development rights were estimated in the hundreds of millions of pounds, even before the billions of pounds needed to build new floating wind farms are factored in.

But it is gas that remains a focus, both for consumers and producers. Prices remain high despite warmer weather in Europe, partly due to geopolitical tensions around Russia, although supply has improved since the dark days of late last year.

Given almost half of the continent’s recent LNG imports had come from the US, which is now experiencing a cold snap, Rystad Energy analyst Kaushal Ramesh said supply remained a question even as “overdue bearish” sentiment took hold.  

Looking to the rest of 2022, RBC Capital Markets analyst Biraj Borkhataria said Shell's $8.5bn buyback announcement made his $11.5bn full-year forecast look "conservative", given the high cash flow and continuing divestment programme. 

Shell's chief financial officer Jessica Uhl said the 20-30 per cent of cash flow from operations going to dividend payments was a “floor” and the board could hand out more depending on macroeconomic conditions. Borkhataria said higher payouts could happen only if “the macro holds”.

Shell is certainly appealing on a shareholder returns front in the short term: the question is where it is going after this current sugar rush. On that front there is still uncertainty. Sell. 

Last IC View: Sell, 1,610p, 15 Nov 2021