Interactive Investor

ii view: Shell in a rush to return $5.5 billion to shareholders

7th January 2022 11:17

Keith Bowman from interactive investor

Diverse operations and a forecast dividend yield of close to 4%. We assess prospects for this oil giant. 

Fourth-quarter trading update to 31 December

ii round-up:

Oil and gas major Royal Dutch Shell (LSE:RDSB) plans to return $5.5 billion via buybacks "at pace" following the $9.5 billion sale of its US West Texas Permian shale field to ConocoPhillips (NYSE:COP) last year. 

In a fourth-quarter trading update ahead of Q4 results on 3 February, Shell also detailed a turnaround in the performance of its gas trading business, but warned about dampened demand for oil given the spread of the Omicron variant. 

Shell shares drifted marginally lower in UK trading, having gained by around a fifth over the last year. Shares for rival BP (LSE:BP.) are up by a similar amount, while the FTSE 100 index is up by almost 9%. The oil price has gained around 50% over the last year and has climbed by more than 150% since pandemic lows in March 2020.  

The sale of Shell’s Permian field came as the company's board concentrates on value over volumes and disciplined management of group capital. A total of $7 billion of the $9.5 billion sale proceeds have been and will be returned to shareholders with the balance used to strengthen its finances. 

Further details of the amount and pace of total shareholder distributions will be outlined at the upcoming Q4 results announcement. The Permian return comes on top of Shell's targeted 20-30% of cash flow returns from ongoing operations.

Performance for its Integrated Gas business is expected to be significantly better than the prior third quarter, overcoming ongoing supply issues. And aided by the large scale and scope of its Liquefied natural gas (LNG) trading operations and the current high LNG spot price.

Results for its oil products division are expected to be in line with the fourth quarter 2020, but down on the prior third quarter due to seasonal trends, the demand impact due to Omicron and foreign exchange impacts in Turkey.

ii view:

Given climate change concerns and accelerated by the onset of the global pandemic, Shell has been focusing on lower-carbon fuels. Lower profit margins in the power and renewable energy sectors have raised the need to reduce organisational complexity and lower the cost base. In 2021, US activist investor Third Point also threw open the debate as to whether oil and renewables can sit comfortably together, calling for Shell to be broken up. 

For investors, volatility in energy prices and the feed in from factors such as the weather and geopolitics offer an ongoing challenge. Concerns regarding fossil fuels and climate change now ask questions of investors under Environmental, Social, and Governance (ESG) policies operated by many institutional investors. 

More favourably, a significant gain in oil and gas prices since pandemic lows in 2020 has boosted cash flows and allowed Shell to reduce debt. The same recovery has also allowed management to refocus on the dividend payment following its first cut since the Second World War early in 2020. A forecast future dividend yield of close to 4% (not guaranteed) is attractive in this ongoing era of ultra-low interest rates. In all, and with the consensus analyst estimate of fair value now sat at just over £21 per share, Shell shares look to remain worthy of ongoing long-term support.

Positives: 

  • Geographically diverse operations
  • A focus on shareholder returns

Negatives:

  • High competition for renewable energy assets
  • The weather can raise operational challenges

The average rating of stock market analysts:

Strong buy

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