City experts hope the oil major may use an upcoming investor meeting to give a clue as to future dividend policy. It could be a catalyst for short-term gains.
New dividend guidance will be on the watchlist for Shell (LSE:SHEL) investors next week when chief executive Wael Sawan delivers a major strategy briefing in New York.
The capital markets day on 14 June may also reveal whether Sawan, who took the helm on 1 January, intends to revise oil and gas production targets after rival BP (LSE:BP.) recently took a perceived partial step back from its previous low carbon commitments.
Ahead of the briefing, Deutsche Bank has added Shell to its catalyst “buy” idea list as it looks for Sawan to underscore the strength and resilience of the company’s strategy and asset base.
The bank has a price target of 2,907p, which compares with this afternoon’s 2,237.5p after further volatility caused by a downward move in Brent crude towards $75 a barrel. The stock trades in line with the wider European sector on 6.2 times forecast 2023 earnings.
The bank said yesterday: “Shell remains the default high-quality global gas play in our view and hence a viable investment in the global energy transition and net-zero 2050.
“We reiterate our “buy” rating as our top sector pick. We think that any commitment for an increased ordinary dividend per share payout with the forthcoming capital markets day would likely drive short-term outperformance versus the sector.”
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Shell's current distribution policy is for a "sustainable progressive dividend", with minimum 4% a year growth. The dividend yield is currently 4.3% versus a European sector average of 6.4%, although this is distorted by some special dividends and still compares favourably with US integrated peers.
Deutsche Bank believes that a rebased dividend could easily be afforded, with its analysis indicating that free cash flow would cover the ordinary dividend policy down to $30 a barrel.
However, it added: “Some caution is warranted for sure, given the last 20 years huge gyrations in oil prices, but setting a dividend per share policy for a sustained $30 a barrel world seems overly conservative, in our opinion.
“The only real point against Shell changing its policy is simply that Shell is cautious by nature, and avoiding a repeat of the 66% dividend cut shock of April 2020 will be an understandable priority.”
On future oil and gas production, the bank said it seems unlikely that Shell will step back from what is already a very modest 1-2% a year decline target.
An area of focus will be the potential to ramp up biofuels investment, from the current plan for an eight times scale up by 2030 and accounting for over 10% of fuel sales. Carbon capture storage is another area where targets could be increased.
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Deutsche Bank said it would not be a surprise if on a like-for-like basis Shell's capital expenditure guidance is increased from the 2023 level of $23-27 billion a year.
As well as the capital markets day, the other reason for Deutsche Bank’s catalyst call is the potential for a counter-seasonal rise in European gas prices over the summer.
This could happen if the industry’s storage-rebuild lags expectations, or if any unexpected gas supply risks emerge. Prices have fallen 61% year-to-date, back to near normal levels.
Factors undermining Deutsche Bank’s short-term investment case include sudden a drop in oil prices or if Sawan’s presentation underwhelms investors in New York, possibly by focusing on relatively low return renewable projects at the expense of higher returning options.
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