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Shell - full year earnings ahead of expectations

Shell saw 2022 revenues leap 46% to $381bn. This was driven by strong growth across all core business lines bar the relatively small upstream...

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Shell saw 2022 revenues leap 46% to $381bn. This was driven by strong growth across all core business lines bar the relatively small upstream segment, which is involved in the exploration and production of hydrocarbons. Revenues here fell from $9.2bn to $8.4bn.

Pre-tax profit more than doubled from $29.8bn to $64.8bn, reflecting higher refining margins and strong trading and optimisation results, which more than offset lower volumes, and a fall in chemicals margins.

Free cash flow increased by 13.9% to $46.0bn, and Shell ended 2022 with net debt of $44.8bn, down from $52.6bn.

Shell has declared a fourth quarter dividend of $0.2875, up 15% on that declared in the third quarter. $18.4bn was spent on share buybacks over 2022, with a further $4bn announced for the first quarter of 2023.

The shares were up 2.0% in early trading.

View the latest Shell share price and how to deal

Our view

Oil and natural gas prices have come down from the highs seen earlier last year. But with average prices for 2022 still considerably higher than those seen in recent years, Shell has still been able to post record profits.

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

Shell's renewables and Energy Solutions segment is also growing the top line and makes up nearly 14% of group revenues. 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.

A major concern is 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. If this pressure continues to build, there's a real risk the company could suffer financial consequences sooner than later.

Shell can afford to dabble in renewables, and it does have other levers it can pull if the oil price slips further. Shell has been able to offset the more recent fall in prices through a strong performance in its Liquified Natural Gas trading division where long term contracts enable it to mitigate volatility.

But for now oil & gas prices remain a key driver of profits. That's a significant risk as we stand on the brink of recession. 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.

However, Shell's wide range of guidance for the first quarter on most key operating metrics suggest little scope for a material increase in volumes. This also indicates a degree of uncertainty even for the immediate future. 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.

Shell's ESG risk is below average compared to its industry peers.

This ESG section is new. Let us know what you think by completing a quick, 2 question survey to help us improve these updates.

ESG data sourced from Sustainalytics.

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 February 2023