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Shell - cash allocation shifts toward shareholder returns

Shell issued an update to shareholders ahead of its capital markets day...

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Shell issued an update to shareholders ahead of its capital markets day.

Capital expenditure is expected to reduce to between $22bn-$25bn for 2024 and 2025, against a prior guidance range of $23bn-$27bn in 2023.

Shell also set out a target to reduce underlying operating costs between $2bn and $3bn by 2025.

These reductions underpin the promise to increase shareholder distributions to 30-40% of cash flows from operations, compared with 20-30% previously. In the short-term, that translates to a 15% increase in dividends from the second quarter onwards, and a pledge to repurchase at least $5bn of shares in the second half.

Shell has reiterated its commitment to net-zero emissions by 2050, but now envisages "stabilising liquids production to 2030" against previous targets to gradually reduce oil output.

The shares were flat following the announcement.

View the latest Shell share price and how to deal

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.

The group's 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.

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. 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, the 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.

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, there remains a major threat that oil & gas groups in general risk the fate suffered by tobacco companies. With investors turning their noses 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. Allegations it's inflating its spend on renewables, and bans of some of Shell's advertising by the UK's advertising watchdog as part of a crackdown on "greenwashing" suggest 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 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: 14th June 2023