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Shell - more buybacks and raised dividend as profits plummet

Shell's second quarter revenue fell 14.2% to $74.6bn. Integrated Gas saw a decline of 27.3% reflecting lower realised prices and lower trading activity.

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Shell's second quarter revenue fell 14.2% to $74.6bn. Integrated Gas saw a decline of 27.3% reflecting lower realised prices and lower trading activity. Revenue from Renewables and Energy Solutions dropped by 36.8%. Here Shell noted lower demand and decreased volatility in its trading activities.

Underlying earnings fell by 47% to $5.1bn with the biggest fall seen in Upstream. This reflected lower oil prices, and lower production volumes largely due to disposals.

Free cash flow was relatively stable down to $12.1bn from $12.5bn. Falling capital expenditure largely offset the reduction in operating cash flows.

This quarter Upstream production is set to remain relatively stable but is expected to fall in Integrated Gas, reflecting scheduled maintenance.

Shell increased the quarterly dividend to $0.3310 per share. Share buy backs in the period totalled $3.6bn and a fresh $3.0bn was announced today.

The shares fell 1.9% in early trading.

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Our view

Shell's feeling the impact of lower oil and natural gas prices. Oil prices are an unpredictable but crucial element of the group's fortunes. The return to more normal price levels has also seen a downturn in its gas and energy trading activities.

However, Shell's not entirely a one trick pony. It's a leading supplier of Liquified Natural Gas (LNG). We think the outlook for this part of Shell's business remains positive, and Shell's planning to grow sales volumes in this category by between 20 and 30% by 2030.

Over the long-term, there are ongoing efforts to future-proof the business through renewables. The Renewables and Energy Solutions segment is going through a rocky patch but much of that relates to energy trading which is reported alongside its renewable products. Meanwhile we saw more than two-fold expansion in renewable power generation capacity over 2022. It's network of service stations leaves it well placed to execute ambitious expansion plans for electric vehicle charging.

Strong financials enable it to self-fund significant organic investment, but with a big chunk of cash flows ringfenced for shareholder returns, we have some concerns as to how long this can continue. We've already seen this year's capex guidance trimmed in the face of challenging trading conditions. 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. Rumours have emerged of a potential sell down of its green energy assets. Whilst this could boost the company's balance sheet and reduce the immediate demands on cash, we think it would be the wrong move for the long-term.

Either way, oil & gas prices and production volumes remain a key driver of profits for now. 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 it will be a difficult path, and for now there are doubts as to how committed Shell is to the journey.

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 has been 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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Article history
Published: 27th July 2023