Interactive Investor

Shell profit plunges but City had expected worse

There's been a positive reaction to annual results from the oil major despite some significant declines. ii's head of markets explains why.

1st February 2024 08:30

Richard Hunter from interactive investor

    In what was a difficult year for the oil majors, Shell (LSE:SHEL) ended on something of a high note as fourth-quarter numbers beat expectations despite lower earnings.

    A wavering oil price was inevitably the main culprit for the reduced full-year result, but there were any number of factors in play. Lower refining margins, volumes and oil trading were coupled with higher operating expenses and, as previously trailed, impairment charges of $3.9 billion added to the headwinds. 

    From a broader perspective, and despite the current geopolitical tensions which have provided a base for the oil price, the uncertain economic environment globally has left the demand situation unclear.

    China, for example, is grappling with its own economic challenges, while higher interest rates and generally higher costs for businesses all feed into the mix. At the same time, the industry is the focus of some debate from an environmental perspective, with the ever-increasing possibility that some investors will be unwilling or unable to invest in the sector on ethical grounds.

    Last year’s challenges become starkly evident in the top line numbers. Revenues declined by 54% to $19.4 billion in the year to 31 December, and the preferred metric of profit – on a current cost of supplies basis – fell to $20.3 billion from a previous $41.6 billion, a year which had seen elevated oil prices given the conflict between Russia and Ukraine.

    Adjusted earnings fell by 29% to $28.25 billion in 2023, although the number beat estimates of $26.82 billion, and the fourth quarter in particular showed a strong turnaround, with earnings of $7.3 billion surpassing expectations of $6 billion. There were also signs of improvement, with higher production and an improved contribution from the LNG business, underlining the importance of Shell’s diversified business model in times of economic stress.

    The company’s extraordinary cash generation, despite the lower earnings, has not prevented an increase to the dividend, where the forward yield of 4.2% provides some attraction to income-seeking investors.

    In addition, Shell has announced another share buyback programme of $3.5 billion to be completed on the coming quarter. Net debt is generally travelling in the right direction also, reducing from $44.8 billion the previous year to $43.5 billion, although ticking up from the figure of $40.5 billion at the end of the previous quarter.

    Given the general external pressure, the transition towards renewable energy remains in focus. While this part of the business remains in relative infancy, the market remains fraught with challenges. Either unproven technologies or simply unprofitable forays thus far are making progress difficult, while Shell’s decision to dial back on climate change friendly investments last year received a mixed response. 

    Even so, Shell is able to absorb these developmental losses with relative ease, especially if the business remains underpinned by an oil price which has risen by 4.6% so far this year.

    The financial largesse which the group has been able to display in terms of both shareholder returns and further investment in the business generally is something of a reminder that, while oil is of course a finite resource, it will remain on the scene for some considerable time to come in the absence of other viable alternatives.

    Shell has once more shown how the sheer scale of its operations allows the group to ride the waves of an economic cycle, which can bring major challenges as well as rewards.

    Quite apart from the share buyback programme and dividend contributing to shareholder returns, the share price has added 3% over the last year, as compared to a dip of 1.7% for the wider FTSE100 index.

    The company tends to be the preferred choice over BP (LSE:BP.) in terms of the market consensus, and currently stands at a 'buy'. Indeed, this positive general view is reflective of Shell’s ongoing position as an important constituent of many portfolios.

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