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Shell - new share buyback programme announced

Shell's fourth-quarter revenue fell to $78.3bn, from $101.3bn at the same time last year...

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Shell's fourth-quarter revenue fell to $78.3bn, from $101.3bn at the same time last year. This includes the effect of lower oil prices and volumes. Looking at quarterly trends, its Integrated Gas, Chemicals and Products, and Renewables & Energy Solutions divisions have all seen growth.

Underlying earnings fell 25.6% to $7.3bn, reflecting lower refining margins, lower margins from crude and oil products, as well as higher operating expenses.

Free cash flow more than halved to $6.9bn, while net debt crept slightly lower to $43.5bn.

The group announced a quarterly dividend of $0.3440 per share. Shell announced a new share buyback of $3.5bn, expected to be completed by May 2024.

The shares rose 2.5% following the announcement.

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Our view

Oil prices are an unpredictable but crucial element of Shell's fortunes. And as they've fallen, Shell's fourth-quarter revenue and profits have both moved lower with them.

However, Shell's not entirely a one-trick pony. Its Liquified Natural Gas (LNG) trading division performed well this year, helping to offset some of the declines in other areas of the business. With geopolitical tensions rising and 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 has seen a 13% expansion in its renewable power generation capacity over 2023. But like the other divisions, its fortunes are largely at the mercy of prevailing energy prices, which lie outside of the group's control. 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 and that threat could keep a ceiling on the group's valuation. We're not immediately concerned that 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's 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. 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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 1st February 2024