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Shell - $4bn buyback announced after Q1 earnings beat

Shell's first quarter revenue was up 3.3% year-on -year to $87.0bn.

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Shell's first quarter revenue was up 3.3% year-on-year to $87.0bn. Growth in Renewables and Energy Solutions, and Upstream more than offset declines from Integrated. However, revenues were sharply down from the fourth quarter of 2022, reflecting lower oil and gas prices.

On a yearly basis, underlying earnings grew at a slightly faster rate than revenue, up 5.7% to $9.6bn, and ahead of market expectations.

Free cash flow totalled $9.9bn, down by $0.6bn. Shell ended the quarter with net debt of $44.2bn, 8.8% lower than the same time last year.

Overall, second quarter production levels and marketing sales volumes are expected to be broadly in line with the first quarter, as is refinery utilisation. However, utilisation rates of Shell's chemical manufacturing plants are expected to fall as it adapts to the low margins being seen at the moment.

A first quarter dividend of $0.2875 was announced, in-line with last quarter. Shell has also launched a $4bn share buyback programme to be completed by the end of July.

The shares were up 3% following the announcement.

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Our view

Shell's had a good start to 2023 but oil and natural gas prices are coming under pressure. Oil prices are an unpredictable but crucial element of the group's fortunes. However Shell's not entirely a one trick pony.

Shell has been able to offset the more recent fall in prices through a strong performance in its Liquified Natural Gas (LNG) trading division. With limited supply coming online in the near term, we think the outlook for this part of Shell's business remains positive. And over the long-term, Shell is making efforts to future proof the business through renewables.

Shell's renewables and Energy Solutions segment is growing its top line. This has been driven by a more than two-fold expansion in renewable power generation capacity over 2022. Underlying earnings are still just a fraction of the group total for now. We expect its contribution to grow over time.

Shell's committed to achieving net zero by 2050 - that means reducing the group's emissions as well as those that come from the products they sell. That will require significant investment in new technologies, or a further restructuring of the current business. As it stands, Shell's development portfolio contains a wide spread of traditional oil and gas projects as well as renewable energy and low carbon fuel developments. But it is unlikely to turn its back on fossil fuels for some time to come.

Shell's strong financials enable it to self-fund significant organic investment, and selective acquisitions such as the recent $2bn takeover of Biogas producer Nature Energy.

Despite the progress being made in renewables, there remains a major threat that oil & gas groups in general risk the fate suffered by tobacco companies. With investors turning their nose up at tobacco stocks at any price, valuations in the cigarette industry have sunk to what would ordinarily be considered unsustainable lows.

We're not immediately concerned Shell will end up in the ethical waste bin. But the risks are growing. A lawsuit alleging the company hasn't taken the appropriate action on climate change together with allegations it's inflating its spend on renewables suggests the issue is heating up.

Ultimately, oil & gas prices and production volumes remain a key driver of profits. That's a significant risk as we stand on the brink of recession and production flatlines. The valuation is well below the long-term average suggesting that the market is already expecting some volatility. In time, a successful execution of its renewables roll-out has the potential to drive a re-rating. But 2023 is likely to be a much more challenging year.

Environmental, social and governance (ESG) risk

Environmental concerns are the primary driver of ESG risk for oil and gas producers, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.

According to Sustainalytics, Shell's management of material ESG issues is strong. This reflects a change in it's business mix over recent years towards lower carbon fuels such as gas and L&G, and the exit from some of its more controversial assets. Despite Shell's numerous environmental and social targets, the company's impact on the environment and society remains relatively high. Controversies relating to environmental degradation, bribery and corruption, and community relations continue to play an important role in how Shell is perceived globally, as well as its financial disclosures around its renewables business.

ESG data sourced from Sustainalytics

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Shell key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 4th May 2023