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Shell - shareholder pay-outs boosted despite dip in profits

Third quarter underlying cash profits (EBITDA) fell 7% from the previous quarter to $21.5bn.

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Third quarter underlying cash profits (EBITDA) fell 7% from the previous quarter to $21.5bn. This was mainly due to a 17% decline in Integrated Gas as supply constraints and operational issues offset higher prices. Reduced margins in chemicals and refining and a 7% increase in operating expenses also contributed to the decline. The bright spot was upstream which saw underlying cash profits rise 12%, reflecting an increasing proportion of higher-value Deep Water barrels sold. The group's retail network (marketing), saw a 4% rise in underlying cash profits as increased usage of the group's EV charging stations partly offset weakness elsewhere.

The Renewables and Energy Solutions business remained in the red including the value of the group's commodity hedges. Excluding these, cash profits were $530m, down 48% from the previous quarter due to price volatility and rising operating expenses.

Free cash flow was down from $12.4bn in the second quarter to $7.5bn, as Shell increased its holding of European gas inventories.

Net debt rose slightly on a quarterly basis due to reduced cashflow and the debt taking on in the Sprng Energy acquisition. However it was down from $57.5bn a year ago to $48.3bn.

The group announced a $4bn buyback programme and proposed a 15% increase for the fourth quarter dividend.

The shares were up 1.5% following the announcement.

View the latest Shell share price and how to deal

Our view

Oil prices have come down from their summer highs and that's eating into Shell's margins. However although the group may not be printing money at the same rate it once was, times are still relatively buoyant.

Oil prices are elevated by historical standards - brent crude is trading at over $90 a barrel at the time of writing. That's compared to lows of about $19 during the height of the pandemic. This is helping Shell slice tens of billions off net debt, and fund capital expenditure into new gas fields as well as low carbon alternative fuels.

CEO Ben van Beurden is in the process of stepping down, which could mean there are changes in the pipeline. Wael Sawan, currently the head of the group's integrated gas and renewables division, will replace him.

Until now Shell's renewable strategy has been underpinned by a "wait and see" approach. With Sawan taking over, it's reasonable to expect that some clearer direction, and perhaps a more forward-thinking approach, are on the way.

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. About a third of its capital expenditure has been earmarked for investment in low and zero carbon products, which will rise to around half in 2025.

Despite likely tweaks to the strategy, Shell is probably going to be 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 have been moving in the right direction over the past 9 months. However a quarter on quarter stumble this time around means investors will have a close eye on this division moving forward. If it's to become part of Shell's growth engine in the future, it will need to be firmly in the black. This is still just a tiny drop in Shell's $7bn 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 since being slashed during the pandemic, a reflection of the improved balance sheet. With plenty of other demands 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 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.

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: 27th October 2022