Shell ups dividend despite tumbling profits

Shell (SHEL) has tempered expectations about shareholder returns by sticking to its existing dividend increase policy and keeping buybacks flat, even after beating fourth-quarter earnings forecasts. 

The full year picture was less positive, although the 30-per-cent slide in adjusted earnings came after a record-breaking 2022 driven by soaring oil and gas prices. 

Adjusted earnings for 2023 were $28.3bn (£22.4bn), and $7.3bn for the fourth quarter, a fifth ahead of consensus forecasts. Integrated gas saw a 57-per-cent quarter-on-quarter rise in adjusted earnings to $4bn, off the back of higher prices and higher trading profits. The upstream division beat forecasts by 24 per cent in the fourth quarter with adjusted earnings of $3.1bn, and even beat the Q4 2022 figure. 

Shell has aimed to increase its output of oil and gas, continuing a strategy that has taken its valuation ahead of BP (BP.). That advantage has narrowed in recent weeks after BP confirmed Murray Auchincloss as permanent chief executive. 

Shell boss Wael Sawan said cutting costs and continuing to “simplify our organisation” would remain the focus in 2024. He added that the company had cut $1bn of costs in 2023, and flagged an increase in production in the next two years. “The projects which came onstream this past year, at their peak, will add over 200,000 barrels of oil equivalent per day (boepd),” he said. Shell’s 2024 average output was 2.8mn boepd, down 3 per cent on 2022, while its reserves climbed 2 per cent to 9.8bn boe. 

Looking at the balance sheet, the company had flagged significant impairments to knock cash flow from operations, but the $4bn that came through was ahead of analyst expectations. 

The quarterly payout will climb 4 per cent to 34.4¢ a share, as per the annual increase policy, and the buyback programme will stay at $3.5bn a quarter. Jefferies analyst Giacomo Romeo said the dividend increase was “slightly disappointing”, but “suggests that the company is prioritising capital allocation towards buybacks”. 

The payout ratio is 42 per cent of cash flow from operations, beyond the stated policy of 30-40 per cent. Romeo had said the buyback may come down given the impairment impact in the fourth quarter, so a stable buyback could be seen as a positive. 

The outlook for this year is for flat cash flow from operations, at around $11bn a quarter, limiting significant payout hikes. Capex is guided at $22bn-$25bn for the year, down from the company's previous range of $23bn-$27bn. Hold. 

Last IC View: Hold, 2,348p, 27 Jul 2023