An improved macro-economic outlook and a dividend yield of over 3%. Buy, sell or hold?
Second-quarter trading update
Anglo-Dutch oil giant Royal Dutch Shell (LSE:RDSB) today announced plans to increase its shareholder returns following a rise in oil and gas prices and an improved economic outlook.
Share buybacks or dividends will be raised to between 20% to 30% of operational cashflows starting as of the coming second-quarter results due on 29 July, when more details are expected.
The news surprised analysts, with a boost to returns generally expected later in the year. Shell shares rose by more than 2% in UK trading.
The oil price recently hit a six-year high and production talks between OPEC and its oil-producing counterparts were recently postponed indefinitely.
Shell shares are up by around a third since pandemic market lows in March 2020. Shares for major UK rival BP (LSE:BP.) are up by around a fifth, while French major TotalEnergies (EURONEXT:TTE) is up more than 40%.
Shell had previously committed to raise returns once its net debt had fallen below $65 billion. Management today scrapped the target, although gave no details on its current net debt position. It did however recommit to further strengthening its balance sheet.
Spending plans for the full year will stay below $22 billion. Oil product sales volumes are expected to be between 4,000 and 5,000 thousand barrels per day. That’s still comfortably below the 6,500 thousand barrels per day achieved back in the pre-pandemic second quarter of 2019.
Given climate change concerns, and following the onset of the global pandemic, Shell is now looking to focus on lower-carbon fuels. Lower profit margins in the power and renewable energy sectors has raised the need for it to reduce organisational complexity and lower the cost base. And allowing it to compete with both existing players such as SSE (LSE:SSE) and other oil majors like BP also moving in a similar direction.
For investors, volatility in energy prices and the feed in from factors such as the weather and geopolitics offer an ongoing challenge. Previous write-downs in business asset values and the 2020 cut to the dividend payment were also not good news, if arguably required for Shell to reset its strategy.
But a 150%-plus rise in the oil price since pandemic lows in March 2020 has boosted cash flows and allowed it to reduce net debt. A further increase to shareholder returns is now being scheduled, with the company having previously raised its first-quarter dividend payment by 4% from the previous quarter to 17.35 US cents per share. Shell now sits on a historic and forecast dividend yield of over 3%, arguably not derisory in an era of ultra-low interest rates. In all, while some caution remains sensible, a revived economic outlook and a current analyst fair value target of £17.88 per share both offer long-term incentives.
- Increasing shareholder returns
- Previous purchase of BG Group improved both its product diversity & climate change credentials
- The weather can raise operational challenges
- Competition in its new focused arena is increasing
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