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Shell - profits surge as energy prices rise

A $3.9bn charge related to the withdrawal from Russia meant net profits fell 38% from the fourth quarter to $7.1bn.

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A $3.9bn charge related to the withdrawal from Russia meant net profits fell 38% from the fourth quarter to $7.1bn. However, excluding this and the impact of price fluctuations on contracts and investments, underlying cash profits (EBITDA) rose 16% to $19.0bn.

A $0.25 dividend was announced, reflecting a 4% increase from the fourth quarter. The group's completed $4.0bn of the previously announced buyback programme. The second $4.5bn of repurchases is planned for the current period.

Shares rose 3.1% following the announcement.

View the latest Shell share price and how to deal

Our view

The move to exit from Russian joint ventures took a $3.9bn bite out of the bottom line, and it will have some lasting effects. The loss of the Sakhalin project means liquified natural gas will take a hit. That's not ideal given Shell has been trying to expand that side of the portfolio. Still, it's a minor blemish on an otherwise rosy outlook.

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 $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 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 and supporting ongoing share buybacks.

Operating expenditure is creeping up, 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 is 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 $19bn 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 even if it drags on profits. 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.

First Quarter Results (comparisons to Q4 unless stated)

Integrated Gas continued to benefit from favourable conditions, though higher maintenance at some sites meant production volumes declined 8% to 896,000 barrels of oil equivalent (boe) per day. This was offset by a $676m benefit from increased in realised prices and underlying cash profits rose 4% to $6.3bn.

Underlying cash profits rose 6% to $9.0bn in Upstream. This reflected an $893m benefit from increased in realised oil prices, which offset a 4% decline in volumes due to milder weather and divestments in the Permian business.

Marketing, which houses Shell's electric vehicle charging and retail network, saw underlying cash profits rise 18% to $1.3bn. This was driven by a $135m decline in operating expenses. Sales volumes declined 6% due to seasonal effects in Mobility.

Underlying cash profits in Chemicals and Products nearly tripled to $2.0bn, reflecting a $1.1bn Refining and Trading margin improvement. Sales volumes fell from 3,475 tonnes to 3,330 tonnes.

An "exceptional" market environment meant underlying cash profits in Renewables and Energy Solutions rose from $80m to $521m. Generation capacity for future contracts rose 6% to 3.6 gigawatts but existing capacity fell from 1.2 gigawatts to 1.0 gigawatts.

Free cash flow, excluding the proceeds from asset sales and non-core spending, rose from $3.2bn to $10.3bn. Net Debt was $48.5bn, down from $52.6bn. This meant gearing, which measures reliance on debt, fell to 21.3% from 23.1%.

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: 5th May 2022