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Shell - new $3.5bn buyback following solid 3rd quarter

Shell's third quarter revenue rose 2.4% to $76.4bn.

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Shell's third quarter revenue rose 2.4% to $76.4bn. Marketing saw the biggest uplift due to higher seasonal volumes to aviation customers.

Underlying earnings increased by 23% to $6.2bn with the uplift primarily driven by higher refining margins, as well as increased production and higher oil prices achieved in the upstream division.

Free cash flow was flat at $7.5bn, whilst net debt fell to $40.4bn. from $48.3bn.

This quarter Upstream production is set to be at least as high as the period just reported. For Integrated Gas the mid-point of production guidance suggests a flat quarter ahead. Refinery utilisation is expected to fall from 84% to a range of 75-83% due to scheduled maintenance.

The dividend has been upped from $0.25 per share to $0.331. Shell has launched a further $3.5bn share buyback meaning that repurchases in the second half are likely to be above earlier guidance.

The shares were up 2% following the announcement.

View the latest Shell share price and how to deal

Our view

Oil prices are an unpredictable but crucial element of Shell's fortunes. And right now that's doing the bottom line no harm, as tight supplies and geopolitical concerns have driven a recovery in both oil and gas prices. But there's no guarantee that prices will remain elevated.

However Shell's not entirely a one trick pony. It's Liquified Natural Gas (LNG) trading division has made a strong contribution so far this year. And with limited supply coming online in the near term, we think the outlook for this part of Shell's business remains positive.

Over the long-term, there are ongoing efforts to future-proof the business through renewables.

The 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, and recent results have shown just how volatile earnings from these activities can be.

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, the development portfolio contains a wide spread of traditional oil and gas projects as well as renewable energy and low-carbon fuel developments.

Strong financials enable it to self-fund significant organic investment, with $10bn-$15bn earmarked for low-carbon energy solutions including biofuels, hydrogen, electric vehicle charging and carbon capture solutions between 2023 and 2025. However, with a big chunk of cash flows ringfenced for shareholder returns, we have some concerns as to how long this can continue. To reduce its reliance on oil and gas-based revenues, investment levels will need to remain high for the foreseeable future.

Despite the progress being made in renewables, the oil & gas industry remains uninvestable for certain institutions. There's the potential for this list to grow. That in turn could keep a ceiling on valuations.

We're not immediately concerned Shell will end up in the ethical waste bin. But the decision to refocus on fossil fuels has been met with some dismay by environmentalists. The valuation has recovered over the last year but remains some way below the long-term average suggesting that doubts remain over the longer-term viability of the business model. In time, a successful execution of its renewables roll-out has the potential to drive a re-rating.

But for now commodity prices and with them Shell's current ability to provide returns to shareholders are likely to be the main drivers of sentiment. In our view that means there's likely to be a lot of ups and downs along the way.

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 its 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. The decision to walk away from medium-term targets to reduce oil production is likely to be met with some disappointment.

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.

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: 2nd November 2023