ii view: Shell surprises City with size of record profit

Beefing up its share buyback programme and sat on an estimated future dividend yield of 4%. Buy, sell, or hold?

Second-quarter results to 30 June

• Adjusted profit up 26% from the previous quarter to $11.47 billion
• Dividend unchanged from the previous quarter at 25 US cents per share
• Net debt down 4.3% from previous quarter to $46.4 billion
• Third quarter $6 billion share buyback programme announced

Guidance:

• Expected full-year capital expenditure unchanged at between $23 billion and $27 billion 

ii round-up:

Oil giant Shell (LSE:SHEL) today posted record quarterly adjusted profit above City forecasts, helping it boost its share buyback programme by a further $6 billion. 

Second-quarter adjusted profit of $11.47 billion more than doubled year-over-year and is up 26% on the first quarter ($9.13 billion). That compared to analyst forecasts for nearer to $11 billion. The new $6 billion buyback adds to the $8.5 billion paid during the first half. 

Shell shares rose by more than 1% in UK trading having come into this latest announcement up around 30% year-to-date, similar to the oil price. Shares for rival BP (LSE:BP.) are up nearer to a fifth during 2022, while shares for the UK’s biggest renewable energy generator SSE (LSE:SSE) are up around 8%. That contrasts with a 17% fall for the FTSE All World index. 

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Shell’s quarterly dividend declared of 25 US cents per share was unchanged from the prior quarter but up 4% from the second quarter 2021. Group net debt fell by just over 4% from the previous quarter and by 29% from a year ago to $46.4 billion, leaving its gearing ratio at 19.3%. 

Production fell 2% from the previous quarter, but profit of $4.9 billion for its upstream operations comfortably beat City forecasts, with earnings from its Renewable and Energy Solutions business of $725 million also surpassing forecasts. 

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Broker UBS reiterated its buy rating on the shares, with the new $6 billion share buyback exceeding its own $4.5 billion forecast. 

Third-quarter results are scheduled for 27 October. 

ii view:

In 2021, Royal Dutch Shell changed its name to Shell. The oil major has interests in exploration and production, refining and marketing, and petrochemicals. Its 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 now investing in building and expanding its Renewables and Energy Solutions business given climate change concerns.  

For investors, concerns about a global recession now overshadow the demand outlook for commodities generally, including the price of oil. A UK government windfall tax has been implemented given energy costs are hitting consumers hard, while tackling climate change issues remains a pressing need for both the industry and governments globally.

More favourably, higher oil and gas prices, propelled by the war in Ukraine, have boosted profits. The recovery in energy prices from the depths of the Covid crisis had already allowed Shell to reduce net debt and begin a renewed focus on shareholder returns. A forecast dividend yield of around 4% is still attractive, despite a relatively recent first cut in the payout since the Second World War.

On balance, and with the wider energy demand/supply outlook still supportive, Shell will likely remain a core holding for many investors.

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