ii view: Shell shares up despite confirming $2bn windfall tax hit

A diversified portfolio of energy businesses and an estimated future dividend yield of over 3.5%. We assess prospects.

Fourth-quarter trading update to 31 December

ii round-up:

Energy giant Shell (LSE:SHEL) today flagged significantly improved fourth quarter trading for its integrated gas division compared to the previous quarter, as market disruption and gas price volatility caused by the Ukraine war continued. 

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The FTSE 100 giant expects to pay an additional $2 billion (£1.7 billion) in quarterly taxes following new EU and UK windfall taxes, although it will not impact fourth quarter adjusted earnings scheduled to be announced on 2 February given the expected timing of payments. 

Shell shares rose by more than 1% in UK trading having come into this latest news up by more than a third over the last year. BP (LSE:BP.) shares are up by a similar amount over that time, while the FTSE 100 index, helped by the oil majors, has gained around 2.5%.

The boost to gas trading for Shell comes alongside an expected drop in Liquefied Natural Gas (LNG) production due a longer than planned plant shutdown for its Prelude floating facilities off the coast of Australia.  

Elsewhere, performances at both its oil downstream and chemicals divisions are expected to be lower than the previous third quarter. The price of Brent crude oil has fallen by about 18% over the last three months, plagued by concerns about weaker demand during a recession. 

Wael Sawan, former director of Shell's integrated gas and renewable energy business, has just taken over the CEO position from Ben Van Beurden. 

ii view:

Formerly Royal Dutch Shell, and having moved its headquarters to the UK, Shell is today a major energy company with interests in exploration and production, refining and marketing, petrochemicals, and LNG. It serves more than 30 million customers at around 46,000 retail service stations every day. Like rivals such as TotalEnergies SE (EURONEXT:TTE), Shell is investing in building and expanding its Renewables and Energy Solutions business given climate change concerns.  

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For investors, worries about a global recession and its impact on expected energy demand cannot be ignored. Additional EU and UK government taxes have also been implemented as energy costs hit consumers hard, while tackling climate change issues remains a pressing need for both the industry and governments globally. Some investors are also avoiding these so-called sin stocks because of environmental concerns.

More favourably, Shell’s diversified business portfolio continues to show its worth, with positives for gas in this latest quarter potentially countering negatives for oil. An ending of pandemic restrictions in China could also help lift demand, while group debt has been on a downward trajectory. The the shares sit on a relatively attractive future estimated dividend yield of over 3.5%, despite previously cutting the payout for the first time since the Second World War due to the pandemic. 

In all, and while some caution remains sensible given recession fears, exposure to still greatly needed if volatile energy commodities, means the company will likely remain a core holding for many investor portfolios.

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