Shell's shareholders benefit despite underlying price falls

Once upon a time, oil executives only needed to concern themselves with production costs and the search for replacement barrels. Nowadays they are forced to deal with capricious government tax policies, while ensuring access to capital by complying with the latest diktats linked to stakeholder capitalism. It’s no doubt terribly frustrating for management and shareholders alike.

Little wonder then that Shell’s (SHEL) new chief executive, Wael Sawan, decided that the energy giant would be best served by refocussing on its core competency – hydrocarbon production. There isn’t much the new man can do about periodic tax raids by HMRC, but he also promised to boost shareholder returns in a bid to bring Shell’s rating in line with its blue-chip American counterparts. To this end, the group has pumped up its second quarterly dividend by 15 per cent, while announcing the beginning of a $3bn (£2.39bn) share buyback programme.   

The returns are set against a period of deteriorating oil and gas prices which saw Shell pull up short of consensus expectations after it posted adjusted earnings of $5.07bn for the second quarter, a 47 per cent decline on the previous quarter. However, the group’s largesse is well supported by half-year free cashflow amounting to $22bn, which was broadly in line with the same period in 2022. Adjusted cash profits for the half-year were down by 15 per cent to $35.9bn against last year, while earnings were held in check by $1.7bn in net impairment charges and reversals over the June quarter.

As things stand, the price of Brent crude is down by around a quarter from this point last year, but the contraction in upstream segmental earnings was not as pronounced in comparison to the integrated gas business. The group’s marketing activities provide a degree of insulation against commodity price falls, as evidenced by a 111 per cent increase in that segment's earnings at the half-year mark. Shell hasn’t abandoned its renewable ambitions despite the refocus on its core products, and this corner of the business delivered a favourable performance despite higher operating expenses.

The group is trading against a backdrop of “lower realised oil and gas prices, lower volumes, and lower refining margins”. With underlying prices in retreat, the group is paring back its capital commitments for 2023 to $23bn-$26bn, down from previous guidance of $23bn-$27bn. This provides further leeway for shareholder returns, but given the share price's correlation to energy prices, we remain on the sidelines. Hold.

Last IC view: Hold, 2,308p, 14 Jun 2023