Second-quarter revenue was up 45% to $94.7bn with strong growth seen in all divisions.
Adjusted earnings increased 128% to $9.8bn ($8.8bn expected) helped by strong pricing, efficiency savings and strong results from trading and optimisation.
Free cash flow nearly trebled to $17.5bn largely through operational performance but also reduced capital spending. Net debt fell $10.8bn from the previous quarter to $41.8bn.
The interim dividend was up 9% to $0.3906 per share, and Shell announced a quarterly buyback of $3.0bn plus a further $1.2bn deferred from the previous quarter.
In the third quarter, Integrated Gas production is expected to rebound sharply, though LNG volumes and trading results are expected to fall. Upstream production and Chemicals & Products trading are both expected to weaken.
The shares rose 1.6% in early trading.
Our view
Shell’s strong start to the year continued into the second quarter, with cash tied up earlier in the year coming back into the business and helping net debt resume its downward path. But the near-term outlook is mixed, with some moving parts across production, trading and LNG.
However, the continuing focus on improving the business mix, including the divestment of Jiffy Lube and the planned takeover of Canada’s ARC Resources, should support further strong delivery as long as integration efforts run smoothly.
Shell’s market leadership in LNG is one point of differentiation against the peer group. The company’s ability to trade its own output as well as third-party supplies leave it well placed to prosper in volatile times. The ARC deal will help plug some of the gap left by Iranian missile strikes at the Pearl GTL facility. But Qatar’s attractive production costs are difficult to match, and there are some longer-term concerns around the viability of LNG.
In distribution, Shell is particularly well placed to provide lower-carbon options to motorists. Its global network of 47,000 service stations is the largest of all the oil majors. Its EV charging footprint has been growing rapidly, but the focus is shifting from scale to profitability.
Shell invests over $20bn each year across its business, and that’s set to stabilise at between $20-22bn out to 2028. The ARC deal adds another $4bn to this year’s bill, but there’s been no change to underlying investment budgets. New projects are expected to deliver over 1 million extra barrels of production per day by 2030. But as with all natural resource developments, there’s the potential for things to go wrong.
Shell’s well-known for its financial discipline, and as we expected, the blip in first-quarter cash generation turned out to be just that. The shares offer a prospective 3.8% dividend yield, while Shell looks well placed to extend its 19-quarter run of buybacks of at least $3bn. However, no distributions can be guaranteed.
Shell’s fortunes remain linked to movements in commodity prices. Its strong position across the supply chain means we think it’s relatively well placed to cope with volatility. We do see some scope for upside to forecasts if Shell executes well and commodity prices remain favourable. But with geopolitical uncertainty still running high and optimism already reflected in the valuation, the market may have little patience for anything short of excellent execution.
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 LNG, 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 hold oil production steady till the end of the decade 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 LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.