Royal Dutch Shell reported second quarter revenues of $60.5bn, up from $32.5bn a year ago on a very strong recovery in oil & gas prices. Underlying profits came in at $5.5bn, up from $638m last year, with progress in Upstream and Integrated Gas offsetting a decline in Oil Products.
The oil major announced an interim dividend of $0.24 per share, up 50% year-on-year, with a $2bn share buyback also announced alongside results.
The shares rose 4.2% in morning trading.
A spectacular recovery in oil prices, now close to the highest they've been since late 2018, has seen Shell complete a rapid volte-face on shareholder returns. Having slashed the dividend by two thirds in 2020, this year the group reached the halfway point and decided to up the payment by 50%. That still leaves the dividend well below 2019 levels, but is on top of a $2bn buyback. If there's a better illustration of the pace of change in the global energy markets we've yet to see it - and it's change that can cut both ways.
To be fair, Shell's newfound optimism isn't entirely unreasonable. Hugely improved oil prices have lit a fire under cash flows, reaching nearly $10bn a quarter once disposals are included, and that's brought net debt firmly under control.
Despite the improving price environment efforts to trim operating costs remain unaffected, and the group is on track to take $3-4bn off operating costs over 12 months and 20% off planned capital investment. Meanwhile lower net debt means gearing (debt as a percentage of total assets) is back under 30%.
Given all the good news, it's perhaps no surprise that shareholder returns are back at the top of the agenda. But they're not the only calls on the group's resources - and given the group's recent scare when oil prices crashed you could argue the group should be taking a more cautious approach and keeping the cash in hand. We expect the transition away from carbon intensive fossil fuels to eat up capital over the coming years and it's not yet clear to us what the likely return will be.
Still the transition will be slow. Upstream accounts for the majority of capital spending, and profits will continue to be driven by oil & gas for years and perhaps decades to come. If the oil price remains buoyant that may be no bad thing for shareholder returns.
Shell key facts
- Price/earnings ratio: 8.2
- Ten year average Price/earnings ratio: 11.5
- Prospective dividend yield (next 12 months): 3.4%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results
Shell's Integrated Gas business reported underlying profits of $1.6bn, up from $362m a year ago. Production increased modestly, with higher prices the real driver of improvement in the division.
Upstream underlying profits moved from a $1.5bn loss a year ago to a $2.5bn profit. Again this was driven by higher prices, with production actually declining on higher maintenance activities.
Underlying profits in the Oil Products division came in at $1.3bn, down from $2.4bn 12 months ago. That reflected lower profits in the Refining & Trading business, as the group experienced lower refining margins, higher operating expense and reduced trading profits as volatility reduced. Chemicals underlying profits more than tripled year-on-year to $670m, with the division benefitting from stronger margins.
Shell reported free cash flow in the quarter of $9.7bn, compared to just $0.2bn in the second quarter of 2020. That's despite a 23.2% increase in capital expenditure, which hit $4.2bn, and reflects improved operating profits and cash from asset disposals.
Net debt stood at $65.7bn at the end of the quarter, down from $77.8bn a year ago. Gearing, the preferred measure of overall indebtedness in the commodities industry, fell from 32.7% to 27.7%.
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