The Shell share price has been one of the early winners of 2022, with the shares up 19% year-to-date heading into this morning's fourth-quarter numbers.
Rebound in oil and gas prices fuels Shell share price gains
The rebound in oil and gas prices has certainly helped its overall position, as well as Shell's share price, after the shock of its huge writedowns and the losses of 2020. However, a disappointing Q3 update prompted calls for the company’s break up from activist shareholder Dan Loeb’s Third Point Group. The bar was raised earlier this week after Exxon Mobil, its US peer, blew away market expectations by posting its largest profit since 2014, with operational cashflow rising to its highest level in 10 years.
Part of the reason for Exxon's outperformance is that it hasn't shed its legacy assets in its attempt to reorientate its business model towards renewables, which is what Shell has started to do. While a sensible goal it also makes it much harder to do it in a way that preserves its margins. In September last year, Shell sold its Permian Basin business to ConocoPhillips for $9.5bn, promising to return $7bn to shareholders, and pay down its debt which fell to $57.5bn.
Its numbers for adjusted earnings for Q3 were disappointing, coming in well below expectations, as well as below Q2’s numbers largely due to the disruptions caused by hurricane Ida which cost the business $400m, as well as higher costs elsewhere. With natural gas prices at record highs in Europe, and at multi-year highs in the US, shareholders expectations for Q4 are therefore justifiably high and they largely appear to have delivered.
Q4 results deliver on shareholder expectations
Q4 adjusted earnings have come in at $6.39bn, well above expectations of $5.3bn, and Q3’s disappointing $4.13bn. As expected, Shell has benefited from the surge in gas prices, with integrated gas earnings contributing the bulk of Q4’s profits, coming in at over $4bn.
Operational cash flow came in at $8.17bn, above expectations of $6.69bn, however this was weaker than in Q3, due to large margin calls in the gas trading business. The refining and trading business slipped to a loss of $251m in Q4, largely due to higher costs, and maintenance shutdowns.
If Shell can get this business firing again, then we could see even better results on a quarterly basis, if energy prices stay high. Despite the slide in operational cashflow in Q4, on an annualised basis it was much better than in 2020, rising from $34.1bn to $45.1bn in 2021. Net debt also came down to $52.6bn, reducing the net gearing to 23.4%.
Shell share price gets buyback and dividend boost
There were no surprises on the dividend, with an increase of 4% to $0.25 a share, while Shell said it would be increasing its share buyback by $3bn to $8.5bn. On capex spending for 2022, unlike Exxon earlier this week, which said it is expanding its production in the Permian, Shell has said it is likely to remain cautious, although it says it will still increase its spending to between $23bn to $27bn.
All in all these are a decent set of numbers, but they also highlight a wider problem in terms of their reliance on their legacy businesses as they transition to renewables, which is a much lower margin business. In the short-term, profits are likely to remain a tailwind for the oil and gas industry, as the reluctance to invest in transitional capacity as we move towards renewables continues to underpin prices. On the plus side, today’s numbers should satisfy activist shareholder Dan Loeb’s Third Point Group, and underline the importance of both sides of the business.
On the politics side, today's profit numbers have inevitably attracted the attention of the Labour party, who have put out a statement today saying it's clear that the recent increase in energy prices has proved to be a huge windfall for the oil and gas companies and as such should they contribute more in the form of a windfall tax on their profits. While that 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 a lot of its North Sea assets. It is the decommissioning of some of these older assets that is reducing capacity and causing the same higher prices that these same politicians are complaining about. You couldn't make it up.
Find your flow: four principles for trading in the zone
Learn about the four trading principles of preparation, psychology, strategy, and intuition, and gain key trading insights from some of the world's top investors.
Get this free report
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
