New Shell (SHEL) boss Wael Sawan has gone for evolution over revolution with his updated strategy for the energy giant, promising higher shareholder payouts, lower overall spending, alongside continued low-carbon project development.
The new plan comes as European energy companies shift back to focusing on core oil and gas production and strong dividends to bring valuations closer to those of their US counterparts. ExxonMobil (US:XOM) and Chevron (US:CVX) have held to the more traditional approach and trade at higher valuations than Shell and BP (BP.).
Sawan said Shell would generate cash during a “balanced energy transition”. “Oil and gas will continue to play a crucial role in the global energy system,” he added, speaking at Shell’s capital markets day at the New York Stock Exchange on Wednesday.
On the same day, the International Energy Agency (IEA) forecast that demand for oil would keep climbing for the next five years, hitting 105.7mn barrels of oil per day (bopd) in 2028, when growth will taper off. The estimate for average 2023 production is 101.3mn bopd.
“Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition,” said IEA executive director Fatih Birol.
Shell confirmed that it would keep oil and gas production at current levels to 2030 – indicating a shift to some growth spending but within a lower-overall capital budget. The previous outlook was for output to fall 1-2 per cent a year in that period.
“We need to continue to create profitable business models that can be scaled at pace to truly impact the decarbonisation of the global energy system,” Sawan said. He added that the world would not move away from fossil fuels at the same pace, and that Shell would be “pragmatic” in its approach to countries further behind in the transition.
The key update for shareholders was a new dividend policy that will see 30-40 per cent of cash flow from operations paid out to shareholders, compared with 20-30 per cent under the current regime. The June quarter dividend will see an immediate 15 per cent increase, although this hike was below analysts’ forecast.
However, Jefferies analyst Giacomo Romeo said another 10 per cent increase was likely given the annual increases built into the new policy and any offsets to its mulit-billion share buyback programme, which has resulted in a lower dividend bill overall.
The company said it would buy back at least $5bn (£3.9bn) of shares in the second half of 2023, compared to the $4bn it has planned for the June quarter. This marks a slowdown but could increase beyond the $5bn depending on conditions.
The flipside is a $1bn-per-year capital spending cut for 2024 and 2025, which Romeo said would be “well-received given investor concerns going into the event about a possible capex increase”.
Operating spending will be cut as well, with $2bn-$3bn in savings targeted by the end of 2025. The company is in the process of selling its Shell Energy, its retailing business in Europe, Shell Pakistan, and oil and chemicals assets in Singapore.
Shell has outlined $10bn-$15bn of spending in its lower carbon business covering carbon capture, biofuels and hydrogen projects, consistent with its previous plans for the division. The company’s shares were flat after the strategy announcement.
