Shell (RDSAN Stock) Share Price Rises on Boost Buyback

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Shell’s share price was one of the early winners of 2022, with shares up 19% year-to-date ahead of today’s fourth quarter figures.

The rebound in oil and gas prices has certainly helped its overall position after the shock of its huge writedowns and losses in 2020, however, a disappointing third quarter update prompted calls for the company to break from the part of activist shareholder Dan Loeb’s Third Point Group.

The bar was raised earlier this week after Exxon Mobil, its US counterpart, swept away market expectations by posting its biggest profit since 2014, with operating cash flow reaching its highest level in 10 years.

This outperformance is partly explained by the fact that Shell has started to shed its legacy assets in its attempt to reorient its business model towards renewable energy. While this is a sensible goal, it is also much more difficult to do so in a way that preserves its margins.

In September last year, Shell sold its Permian Basin business to ConocoPhillips for $9.5 billion, promising to return $7 billion to shareholders and repay debt which had fallen to 57.5 billions of dollars.

Its third-quarter adjusted profit numbers were disappointing, well below expectations, as well as second-quarter numbers, largely due to disruption from Hurricane Ida which cost the company $400 million. company, as well as higher costs elsewhere.

With natural gas prices at record highs in Europe and at multi-year levels in the United States, shareholder expectations for the fourth quarter are therefore understandably high and largely appear to have been met.

Fourth-quarter adjusted earnings came in at $6.39 billion, well above expectations of $5.3 billion and well above the disappointing $4.13 billion in the third quarter. As expected, Shell benefited from the surge in gas prices, with integrated gas earnings contributing the bulk of fourth quarter earnings, amounting to more than $4 billion.

Cash flow from operations came in at $8.17 billion, above expectations of $6.69 billion, but was lower than in the third quarter, due to large margin calls in gas trading activity. The refining and trading business fell to a loss of $251 million in the fourth quarter, mainly due to higher costs and maintenance shutdowns.

If Shell can revive this activity, we could well see even better results on a quarterly basis, if energy prices remain high.

Despite the decline in operating cash flow in the fourth quarter, on an annualized basis, it was much better than in 2020, falling from $34.1 billion to $45.1 billion in 2021.

Net debt also decreased to $52.6 billion, reducing net gearing to 23.4%.

There were no surprises on the dividend, with a 4% increase to C$0.25 per share, while Shell announced it would increase its share buyback from $3 billion to 8, $5 billion.

On capital spending for 2022, unlike Exxon earlier this week which said it was ramping up production in the Permian, Shell said it would likely remain cautious, although it says it will further increase its spending by between $23 billion and $27 billion.

All in all, that’s a decent set of numbers, but they also highlight a broader issue in terms of reliance on their legacy businesses as they transition to renewables, which is a much lower margin business.

In the near term, earnings should remain a tailwind for the oil and gas industry as the reluctance to invest in transitional capacity as we move towards renewables continues to support prices.

On the positive side, today’s numbers should satisfy activist shareholder Dan Loeb’s Third Point Group and underscore the importance of both sides of the business.

On a political level, today’s profit figures have inevitably caught the attention of the Labor Party, which today issued a statement saying it is clear that the recent rise in energy prices is has proven to be a huge boon for oil and gas companies and as should they contribute more in the form of a windfall tax on their profits.

While this may be true in terms of higher profits, these same oil and gas companies have been encouraged by UK government policy over the years to decommission older fields, including much of its offshore assets from the North. It is the dismantling of some of these older assets that reduces capacity and leads to the same higher prices that these same politicians are complaining about. You couldn’t invent.

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