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Shell - growth underpins buyback programme

Net profits more than doubled from the first quarter to $18.0bn.

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Net profits more than doubled from the first quarter to $18.0bn. This included a non-cash accounting charge as the group upped its forecast for commodity prices. Excluding this, net profit was 26% higher at $11.5bn thanks to higher oil prices and elevated demand for gas and power.

The group announced a $0.25 second quarter dividend alongside a $6bn buyback programme expected to complete in the third quarter.

The shares were broadly flat following the announcement.

View the latest Shell share price and how to deal

Our view

With oil trading at over $100 a barrel, these were always going to be good times for oil majors. This has allowed Shell to slice tens of billions off net debt, and fund capital expenditure into new gas fields as well as low carbon alternative fuels.

Shell's committed to halving emissions from operations by 2030, and that either requires significant investment in new technologies, or a further restructuring of the current business.

But Shell is still likely to remain an oil and gas giant for decades. Our greatest 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 projects to keep the group moving in the right direction risk eating into cash flows - especially as many of the newer technologies the industry is exploring are untested at a global scale.

Shell broke out its renewables division for the first time in the first quarter, and there's space to be cautiously optimistic. While the division is still heavily in the red, underlying profits are moving in the right direction. This is still just a tiny drop in Shell's $18bn bucket, but if the group can nudge it into the black while oil prices are soaring it should ease the transition considerably.

Shell can afford to dabble in renewables. That is, as long as the oil price doesn't catch a cold. It's essential the group gets this project firmly on course while it's got a strong wind in its sails. That's easier said than done - volatility and oil prices go hand in hand, particularly with the ongoing geopolitical backdrop.

The prospective yield has come a long way, a reflection of the improved cash position. With plenty of other demands on cash though, growth might be thin on the ground and remember dividends are variable and not guaranteed. The price/earnings ratio is well below the long-term average, which reflects the concerns that Shell's fortunes ultimately depend on something it can't control - oil prices. Even in a best-case scenario, its days of depending on the black stuff are ultimately limited.

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.

Second Quarter Results (All comparisons to Q1 unless otherwise stated)

Production volume in Integrated Gas rose 5% to 944,000 barrels of oil equivalent (boe) per day. Lower maintenance at two of its sites offset the effect of lower LNG volumes due to the exit from Russia. However excluding the impact of accounting charges related to rising gas prices, underlying net profit fell 8% to $3.8bn reflecting the revaluation of some of the group's hedge contracts.

Scheduled maintenance in Upstream meant total production fell 5% to 1,917 boe per day. However higher oil and gas prices and the benefits of joint venture projects helped underlying net profits rise 42% to $4.9bn.

Marketing, which houses Shell's retail and electric vehicle charging network, saw volumes rise 6%. Rising feedstock costs in Lubricants and the impact of higher taxes was more than offset by improved profitability and a seasonal increase in Mobility sales. This meant underlying net profits were 2% higher at $751m.

Improved profitability driven by improved refining margins together with cost saving meant underlying net profits in Chemicals and Products rose 74% to $2.0bn. Sales volumes were 8% lower at 3,054 tonnes.

Volatility in gas and power prices and tax benefits helped underlying net profits for Renewables more than double to $725m. Capacity improved 5% to 1.1 gigawatts and generation capacity for future contracts improved 28% to 4.6 gigawatts.

Capital expenditure was up 38.7% to $7.0bn and is expected to be in line with guidance for $23-$27bn for the full year.

Free cash flow improved from $10.5bn to $12.4bn, reflecting improved profitability. This fed into a 14% decrease in net debt to $44.8bn.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 28th July 2022