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Shell to hike dividend after super profits continue

Shell’s bull-market earnings might have peaked, but the continued buyback scheme and a 15 per cent higher dividend means total returns will climb
October 27, 2022
  • Dividend up, buybacks strong
  • Downward trend from Q2 driven by lower integrated gas earnings

Energy giant Shell (SHEL) is on track for a record year of profits, but its earnings may have peaked on a quarterly basis after its adjusted cash profits fell from the June quarter.

Adjusted Ebitda fell 7 per cent to a still-high $21.5bn (£18.6bn), while working capital changes, higher capital spend and a further $1.4bn of other paper changes knocked the pretax profit down from $26bn in Q2 to $11.4bn. 

Shell, like other North Sea oil and gas producers, was a target of a UK windfall tax that came in over the summer. This did not make a dent in Q3 profits – the company reported a $361mn charge related to the levy but confirmed to media it would not actually be paying anything once the capital spending allowance offset is taken into consideration. 

Year-to-date, the numbers are astronomical – pre-tax profit stands at $48.4bn, compared to $13.6bn from this point a year ago. Shareholders will see a continued buyback programme, worth $4bn across the next four months, while the dividend will climb to 28.75¢ a share, pending board approval. 

The company’s capital spending guidance has remained at $23bn-$27bn for the year, with acquisitions in the renewables space outweighed by a $2bn spend on making US pipeline and terminal business Shell Midstream Partners 100 per cent owned, from 68.5 per cent.

This week, Shell also confirmed a new 9.4 per cent stake in the North Field South liquefied natural gas (LNG) project in Qatar, estimated as a $30bn project overall. Spending is climbing in the space even as the majors have held back from sector-changing acquisitions - BP (BP) bought a biogas company for $3.3bn earlier this month, paying a 38 per cent premium on top of its already elevated share price. 

Operationally, Shell saw a strong performance in Q3 from its upstream division while integrated gas saw a 17 per cent decline in adjusted cash profits, to $5.4bn. Lower trading profits made the difference, as “seasonality and supply constraints” even hit oil majors. 

Analysts said this was still a better-than-expected performance given the relatively downbeat trading update earlier last month. Jefferies analyst Giacomo Romeo said the pay-out had come down but was still above the company’s policy. “Shell maintains a cash flow from operations pay-out well above the 30 per cent-plus guidance for FY22 even with buybacks falling $2bn quarter on quarter (to $4bn),” he said. 

As we said last month, it’s hard to ignore the continued demand for Shell and BP’s products, as well as the significant investor returns. As a long-term stock though, we remain ambivalent given the potential for a rapid energy system shift following this oil and gas bull market. Hold.

Last IC View: Hold, 2,273p, 1 Sep 2022