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Shell - plans to exit equity partnerships with Gazprom

Shell plans to exit its joint ventures with Gazprom and related entities.

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Shell plans to exit its joint ventures with Gazprom and related entities. Gazprom is 49.3% owned by the Russian government. The joint ventures (JVs) relate to Shell's Russian Upstream and Integrated Gas assets. JV's to be exited include a 27.5% stake in the Sakhalin-II liquefied natural gas facility, a 50% stake in the Salym Petroleum Development and the Gydan energy venture. Shell also plans to end its involvement in the Nord Stream 2 pipeline project.

Shell's underlying earnings from the Sakhalin and Salym joint ventures made up under 4% of group earnings in 2021.

The group has around $3.0bn of assets in these Russian ventures, the value of which is expected to be written down through impairment charges. This decision has not affected Shell's planned shareholder returns.

The shares were unmoved following the announcement.

View the latest Shell share price and how to deal

Our view

The move to exit from Russian joint ventures hasn't come as a total surprise, given BP's similar decision and the fact Shell has comparatively smaller exposure to Russia. From an operational perspective, the biggest impact will come from a capacity reduction from the loss of the Sakhalin project. Shell has been trying to expand its liquified natural gas portfolio, of which the Sakhalin stake played a role.

The $3.0bn of assets in Russia will be written down through impairment charges, and this is manageable. The move hasn't affected shareholder return plans (more on that later).

The bigger picture is more directly linked to the yoyoing oil price. Over the last couple of years, this has made Shell's results difficult to keep track of. However, we think the underlying trend is positive thanks to the fundamental strengths of the group's assets.

With oil trading at over $101 a barrel, at 5-year highs, these were always going to be good times for oil majors. This has allowed Shell to slice tens of billions off net debt, and funds capital expenditure as Shell invests in new gas fields as well as low carbon alternative fuels like hydrogen. Disposals have lent a hand too, with the sale of the group's Permian shale fields adding to the financial firepower supporting a new buyback programme in 2022.

Operating expenditure is creeping up again, and given the group's increased environmental commitments, this trend may continue. 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 - neither of which will come cheap.

Whatever happens, Shell will 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.

Fortunately, Shell can afford to dabble - always assuming, of course, that the oil price doesn't catch a cold. We should flag that geopolitical concerns have increased uncertainty, and the likelihood of oil price volatility in the short to medium term should be considered carefully.

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 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.

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.

Fourth quarter results (3 February 2022)

Fourth quarter revenue more than doubled to $90.2bn, reflecting an increase across all segments except Corporate. Rising oil prices offset a 7% decrease in production, which fed through to underlying net profit of $6.4bn, up from $393m a year ago.

The group declared a quarterly dividend worth $0.24 per share and expects to offer an additional dividend worth $0.25 per share in the coming quarter. Shell also announced a share buyback scheme worth $8.5bn for the first half.

Profits at Integrated Gas more than tripled to $4.1bn, excluding $2.6bn relating to commodity derivative contracts. That was more than double third quarter profits, reflecting higher contributions from Liquid Natural Gas (LNG), efficiency improvements and price increases. Production volumes fell 1.6%. and operating cash flow fell 46% to $1.2bn due to unfavourable working capital movements.

Upstream reported underlying profits of $2.8bn, up from a loss of 748m last year owing mainly to price increases. The profit increase helped operating cashflow more than triple to $7.1bn. Production rose 4% from the third quarter following disruption from Hurricane Ida and favourable seasonal effects, but full year production was down 8% reflecting the impact of asset sales and maintenance.

Excluding the impact of taxes and derivative movements, Oil Products reported a $555m profit, a slight uptick from last year. That was down 54% from the third quarter, reflecting an increase in operating expenses and lower Retail margins. The group had a $721m operating cash outflow, owing to negative working capital movements and the timing of emissions certificate payments.

Free cash flow increased from $882m to $10.7bn, helped by the increase in profits and proceeds from the sale of the US Permian business. Net debt improved from $75.4bn last year, to $52.6bn.

Capital expenditure for the full year is expected to be at the lower end of guidance for $23-27bn.

Shell will change the way it reports results 2022. The new reporting segments will be Marketing, Renewables & Energy Solutions, Chemicals & Products, Integrated Gas, Upstream and Corporate.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 1st March 2022