Boom year for Shell ends with another record

Shell’s (SHEL) 2022 profits will likely mark a high point for this energy cycle - its full-year adjusted profit of $40bn (£32bn) was large enough to reverberate beyond the energy sphere, ramping up political rhetoric about energy companies capitalising on Russia’s invasion of Ukraine, which drove up oil and gas prices. 

The US energy giants Chevron (US:CVX) and ExxonMobil (US:XOM) had already announced their own stellar profits - a combined $91bn for 2022 - although both slipped under analyst forecasts in the December quarter after oil and gas prices fell back. 

At the same time, Shell is now facing a scenario where investors have switched focus to energy security rather than calling for the energy giants to add renewables and other transition-friendly assets to their businesses. The company outlined a flat spending outlook for this year compared to 2022, at $23bn-$27bn in capex, and grew its reserves by over 10 per cent in 2022, to 9.6bn barrels of oil equivalent. 

New chief executive Wael Sawan said Shell would “invest with discipline” in existing areas of expertise. 

The outsize profits in 2022 came largely from the integrated gas unit, which saw its earnings triple on to $22bn. The segment did fall back slightly in the December quarter, reporting an 8 per cent drop in earnings, to $5.3bn, although this was largely a paper fall from the revaluation of derivatives. 

A strong trading performance and higher realised prices added $2.8bn in earnings. “This caps off a particularly strong year for the LNG business, benefiting from unprecedented volatility,” said RBC Capital Markets analyst Biraj Borkhataria, adding that the integrated gas earnings had come in 50 per cent higher than his top-end forecast. 

The upstream division brought in $16bn in earnings, although these took a dive in the December quarter thanks to the European ‘solidarity contribution’ (or windfall tax), which took in $1.4bn, and lower oil and gas prices compared to Q3. 

Investors will get a taste of all this cash - after being handed $26bn in 2022 - through a 15-per-cent-higher quarterly dividend starting this quarter, at 28.75¢ a share. Another $4bn buyback programme was confirmed for the March quarter, as expected by analysts. 

The energy security argument really has landed with oil and gas management teams: BP (BP.) is reportedly considering scaling back its green spending plans (as per a Wall Street Journal report) and Sawan said he would focus on “performance and simplification” at Shell. With profits like this, it’s no wonder they are bullish about their existing business models. Investors with a long horizon may wonder what happens when hydrocarbon demand starts to come off, however. Hold.

Last IC View: Hold, 2,418p, 27 Oct 2022