• Strategic shifts awaited
• Gearing falls to 18 per cent
After BP (BP.) slowed its buyback programme earlier this month, all eyes were on Shell (SHEL) for its first-quarter earnings release. It has held the line, however, and will maintain $4bn (£3.2bn) of buybacks for the coming three months. Its adjusted earnings for the first quarter were well ahead of expectations, at $9.6bn compared with consensus of $8bn. Lower energy prices did have an impact – integrated gas earnings fell $600mn through the price level alone – but the company still managed a record for Q1 profits, despite a minor drop compared with the last three months of 2022.
The lower oil and gas prices were balanced out by sales of oil products, a rise in integrated gas volumes and the trading division. The chemicals and products division’s adjusted earnings more than doubled compared with Q4, to $1.8bn. “Shell delivered strong results and robust operational performance, against a backdrop of ongoing volatility,” said chief executive Wael Sawan.
RBC Capital Markets analyst Biraj Borkhataria said the company was in a good position to pay out more. “Shell’s balance sheet on an apples-to-apples basis is much cleaner than peers,” he said. Including leases, gearing is down to 18 per cent, with end-of-Q1 net debt of $44bn. This is down from $48bn a year ago. BP’s gearing on the same basis is 25.5 per cent, down from 31 per cent at the end of March 2022.
The company is likely to announce strategic shifts in next month’s capital markets day, including a potential change to the production outlook – meaning more spending on oil and gas fields. Analysts have also floated potential changes to the dividend and buyback framework.
Like BP, Shell faces a shareholder vote on its emissions and production targets at its AGM, on 23 May. BP shareholders rejected a call to align strategy with the Paris goals – namely cutting production – but the resolution did garner 17 per cent support. “Shell has the engineering prowess, financial muscle, and global market-making capabilities to rapidly scale the transition to renewables,” said campaign group Follow This.
Sawan said on a call with analysts the company would offer greener options in line with calls to cut its scope 3 emissions – those deriving from the use of its products – but underlined that "ultimately this is all about where our customers want to go".
The chief executive also said Shell would be "ruthless" in its focus on putting spending toward profitable projects. Analysts have previously pointed to weak returns from offshore wind and other renewables projects run by the energy majors, compared with oil and gas assets' strong performance in recent years.
The AGM vote comes as European energy giants trade at a discount to ExxonMobil (US:XOM) and Chevron (US:CVX), potentially because of a more balanced approach toward oil and gas.
Last IC View: Hold, 2,407p, 2 Feb 2023
