A brief strategy update saw Royal Dutch Shell confirm it's on track to meet its 2020 commitments, and has increased cash flow guidance for the next five year period.
The shares fell 1.5% in early trading.
Having nursed the dividend through the bad times of the 2014/15 oil price crash, Shell now has the cash to reward shareholders for their loyalty. It's currently working through a $25bn buyback, and hopes to pay out a further $125bn in dividends and buybacks between 2020 and 2025.
The driving force behind progress has been a dramatic improvement in oil prices, but Shell deserves credit too. Operating expenses have been kept under control, and the group has been managing capital expenditure while still developing some major new projects.
But the real acid test is cash flow. Not for nothing do investment bankers say "cash is king". Cash is what a company actually has in the bank to fund investment, service debt and pay dividends.
In 2018, Shell generated enough cash flow to fund the buyback, which is set to go through at a rate of $2.75bn a quarter, fund the significant capex spend and still knock over $5bn off the debt pile. Add in the impact of asset sales and the disposal of shares in other interests, and the group's net debt position actually improved by around $14.5bn over the year.
Those lower debts mean the balance sheet looks much stronger than it has for some time. Debt ticked up in Q1, but forecasts are for it to fall back over the remainder of the year. And with cost savings and production increases kicking in, Shell looks well-placed to fulfil its promises on the buyback. Although of course there are no guarantees here.
The massive buyback means there are fewer shares in circulation, which should boost earnings per share, and reduce the cash burden of the dividend. The prospective yield of 6.1% looks attractive to us, and there's scope for that to grow now the group's on firmer footing.
Shell also has half an eye on a significantly less oil heavy future. It's investing in biofuels, hydrogen, wind and solar assets, and while that's not exactly new, it's increasingly centre stage.
Still, investors shouldn't forget that, for now at least, the group remains dependent on a favourable oil price. Today the price of a barrel of oil is just over $60, but back around the turn of the year it had fallen to close to $50. Given the progress on cutting debt, that's still reasonably comfortable for Shell, but the drop shows that conditions can change quickly.
Strategy Update - 4 June 2019
Shell expects to complete its current $25bn share buyback by the end of next year, while also reducing gearing to 25%. That's supported by free cash flow of $28-$33bn, assuming an oil price of $60 a barrel.
Shell has also set out targets for the next five year period, 2020-2025. The group plans to increase organic free cash flow to $35bn in 2025, assuming oil prices of around $60 a barrel. That would support total returns to shareholders of $125bn across the period, and maintain gearing between 15-25%. Capital expenditure is expected to average $30bn a year over the five years.
Going forwards the group's strategy will focus on three key areas: Core Upstream, Leading Transition and Emerging Power. That broadly translates as below:
- Core Upstream: Deep Water, Shales and Conventional Oil & Gas
- Leading Transition: Integrated Gas, Chemicals and Oil Products
- Emerging Power: Focuses on increasing electrification
Commenting on the new strategy CEO Ben van Beurden said; "All this adds up to a forward-looking strategy that ensures Shell is well-placed to continue to deliver a world class investment case and thrive in the energy transition."
Q1 Trading Details - 2 May 2019
Shell has delivered underlying adjusted earnings of $5.3bn, down 2% on a year ago due to higher corporate losses, but ahead of prior consensus.
The shares rose 1.5% on the news.
Upstream profits rose 11% to $1.7bn as lower costs and higher volumes, mainly from the US Gulf of Mexico and shale operations, offset the impact of a 5% drop in realised oil prices. Production rose 1%, boosted by North America and the reclassification of the Salym asset from Integrated Gas.
Downstream profits rose 3% to $1.8bn, boosted by a strong quarter from the refining and trading business, where earnings more than doubled to $343m. . The dominant marketing division, which includes retail fuel and lubricants, saw profits rise 10% to $1bn. Chemicals earnings fell 34% to $451m, reflecting lower margins in tougher markets.
The Integrated Gas division saw adjusted profits rise 5% to $2.6bn due to higher realised prices and a lower depreciation bill, which more than offset the lower production, which was hit by the loss of Salym.
Central Corporate losses were $671m.
Shell's underlying operating cash flows increased from $10.4bn to $11.3bn year-on-year, reflecting the group's higher earnings. However, on a quarter-on-quarter basis cash flow fell by $1.6bn. Free cash flow of $4bn was more than offset by dividends, buybacks and interest costs, with net debt rising by $4.7bn in the quarter.
That underlying increase, and a change in accounting rules, means gearing, which compares the net debt position to capital, rose from 20.3% to 26.5% during the quarter.
Looking ahead, Shell remains confident in its 2020 outlook.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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