ii view: Shell production boosted Down Under

Combining traditional oil & gas operations with renewable energy and offering a forecast dividend yield of 4%. Buy, sell, or hold?

First quarter trading update

ii round-up:

Oil giant Shell (LSE:SHEL) today flagged expected higher Liquefied Natural Gas (LNG) volumes ahead of its first quarter results due on 4 May. 

Reduced plant shutdowns at its Australian facilities are expected to see production rising to 7-7.4 million tonnes from 6.8 million tonnes in the prior fourth quarter, with earnings forecast to prove similar. Shell last year generated record profits of $41 billion. 

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Shares in the company, currently the second largest in the FTSE 100 index, rose more than 1% in UK trading, having come into this latest news up 11% over the last year, comfortably ahead of a 1.5% gain for the index itself. Rivals BP (LSE:BP.) and TotalEnergies SE (EURONEXT:TTE) are up 40% and 25% respectively over that time.  

Following its 2015 takeover of BG Group, Shell has significant Liquefied Natural Gas (LNG) operations.

Quarterly oil production for the UK headquartered company is expected to prove similar to the last quarter of 2022, with adjusted earnings for its renewable energies business potentially rising to $0.7 billion from a prior $0.3 billion. 

Shell is looking to split-up its renewables and low-carbon division following the arrival of its new head Wael Sawan as part of plans to help boost returns.

Group taxes due are forecast to be between $2.6 billion and $3.4 billion, down from $4.4 billion in the previous fourth quarter. 

ii view:

Founded in 1907, Shell today employs over 80,000 people across more than 70 countries. Its operations span from exploration and production, refining and marketing, to petrochemicals. Strategy under its new head includes further simplifying the company and sharpening performance. Like rivals, and alongside government climate change policy, it has also been investing in building and expanding its renewables production such as wind power and energy solutions in the form of hydrogen and biofuels. 

For investors, the uncertain economic outlook and possible recession continue to raise questions over expected future energy demand. Tackling climate change remains a pressing need for both the industry and governments alike, while soaring consumer energy bills have seen governments increasing their tax demands on the sector.

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More favourably, Shell's diversity of operations across oil, gas and alternatives regularly allows one area of strength to counter one of weakness. Elevated energy prices have pushed group cashflow higher, allowing it to reduce debt and raise shareholder returns in the form of both dividends and share buybacks. China’s emergence from the Covid pandemic could also see strength in the local economy help counter weakness elsewhere. 

On balance, and with the shares standing on forecast dividend yield of around 4% and consensus analyst estimate of fair value at over £28 per share, grounds for continued optimism look to remain. 

Positives: 

• Diversity of operations
• A focus on shareholder returns

Negatives:

• Highly uncertain economic outlook
• The weather can raise operational challenges

The average rating of stock market analysts:

Buy