Will Q2 earnings fuel Shell’s share price?

Shell’s share price might be up this year, but the gains have been muted compared to the bonanza seen last year. Second quarter results out Thursday should provide some insight on how the energy major is performing under CEO Wael Sawan. Since taking over in September, Sawan has prioritised shareholder returns and scaled back commitments to reduce oil production.

• Shell’s share price up 4% so far this year, but lagging last year’s 43% gain.
• Second quarter results out Thursday, with a fall in upstream production likely.
• Shell looks to sell renewable businesses as CEO Wael Sawan focuses on shareholder value.

2022 was a banner year for Shell’s [SHEL.L] share price. The stock soared over 43% as sales doubled thanks to a surge in energy prices following Russia’s invasion of Ukraine. Another solid performance came in the first quarter of this year due to rising liquefied natural gas (LNG) prices and strong trading.

Despite that blockbuster first quarter (Q1) Shell’s shares are up just nearly 4% this year, in line with a cooling in energy prices.

Can upcoming Q2 results provide some fuel to Shell’s share price?

Shell refocuses its business

Since taking over as CEO in September, Wael Sawan has refocused the business around delivering value for shareholders and walked back on commitments to reduce oil production.

In a June trading update, Shell abandoned plans to cut oil production by 1–2% each year until 2030. (Although simultaneously it said that it was making good progress to becoming net zero by 2050.) Shell boss Sawan told the BBC that cutting oil and gas production is “dangerous and irresponsible” and could result in the cost-of-living crisis worsening — a position that was described as “cynical” by a Friends of the Earth spokesperson.

Where Shell plans to spend its money is reveals the company’s future focus. Between 2023 and 2035, Shell plans to spend $40bn on oil and gas production, compared to $10–15bn to support the development of low carbon energy solutions.

Bloomberg reports that Shell is now looking at different sale options for its renewables business. Options include a part sale of its renewable power operations to external investors. Talks are said to be in an early stage. Recently Shell’s head of renewables Thomas Brostrom quit, along with the UK head of offshore wind, Melissa Read.

Shareholders are not uniformly happy about Shell’s recent shift away from its green commitments. At Shell’s AGM in May, protesters disrupted proceedings, while a fifth of the company’s own shareholders voted on a resolution for new carbon emission targets that had been tabled by campaign group Follow This.

Sawan himself has joined UK prime minister Rishi Sunak’s new Business Council which will discuss ways to boost investment and growth in the UK economy. Other members include the bosses of Sainsbury’s [SBRY.L], AstraZeneca [AZN.L] and NatWest Group [NWG.L].

Another area of controversy is Shell trading in Russian gas despite a pledge to stop. According to a BBC report, the company was involved in almost an eighth of Russia’s shipborne gas exports in 2022. Shell said that this was the result of “long-term contractual commitments” that were in full compliance with sanctions, applicable laws and regulations of the countries in which it operates.

What to look out for in Shell’s Q2 results?

Shell posted profits of $9.6bn in Q1, topping analyst expectations of approximately $8bn. Fuelling the numbers were improved operational performance and lower running costs that helped to offset softer oil and gas prices.

Another bumper quarter might be off the cards with Shell saying that it expects upstream production to be down in Q2 due to scheduled maintenance, including assets in the Gulf of Mexico, Norway, Malaysia and Brazil. Upstream production is expected to come in between 1,650–1,750 kboe/d, down from 1,877 kboe/d in the previous quarter. Integrated gas is expected at between 950 to 990 kboe/d. In the previous quarter it was 970 kboe/d.

New deals to keep tabs on include an agreement with Morocco to supply six million cubic meters of LNG to the country over a 12-year period.

Any update on shareholder returns will be keenly watched. In its June update, Shell said that it intends to increase shareholder distributions to 30–40% of cash flow from operations, up from 20–30% previously. This includes upping the dividend 15% in Q2 and implementing a share buyback scheme worth at least $5bn in the second half of the year.

“Performance, discipline, and simplification will be our guiding principles as we allocate capital to enhance shareholder distributions, while enabling the energy transition,” said Sawan.

Where next for Shell’s share price?

Walking back on its commitment to cut oil production hasn’t led to a downturn in Shell’s share price, even if this year’s gains are comparably muted. Yet it also means that Shell’s share price remains vulnerable to any volatility in the oil and gas markets.

Shell’s forward P/E ratio is 7.29, fractionally higher than BP’s [BP.L] 6.37. For income seekers, the stock offers a 3.98% yield. One concern is that revenues are expected to drop over 13% this year, according to data from Yahoo Finance. BP is looking at a similar 12% decline in revenues.

Shell has a median 12-month price target of 2,975.82p. Hitting this would mean striking 23.1% upside on Friday’s close.