Shell improves shareholder returns
Shell has announced it is improving shareholder returns by paying out 30% to 40% of operating cashflow in distributions to shareholders.
That will see it increase its dividend by 15% this quarter to around $0.33 as it tries to accelerate the recovery in payouts after slashing them for the first time since the Second World War during the pandemic….
Still, there is still a long way to go before dividends return back to those pre-pandemic levels and some analysts flagged that this acceleration was slower than the 20% increase expected by the markets, helping explain why we have seen such a tepid response from markets today.
Shell is still lagging in terms of dividends even after today’s increase, which gives it a yield of around 2.2%. That compares to dividend yields at Exxon Mobil at 3.4% and Chevron at 3.8% based on their quarterly payouts in the first quarter of 2023 being annualised.
Shell also pledged to return ‘at least’ $5 billion through share buybacks in the second half of 2023. That compares to the $4 billion-plus that has been returned quarterly over the last three periods.
Shell has cut its capital expenditure budget to around $22 billion to $25 billion per year for both 2024 and 2025, with the oil giant also aiming to cut annual operating costs by $2 billion to $3 billion during that timeframe. For context, Shell is expected to spend anywhere between $23 billion to $27 billion in capex this year.
Can Shell close the valuation gap?
The move by Shell today is in an effort to close the valuation gap against its US rivals, with Exxon Mobil and Chevron currently trading at a 75% premium to their London-listed peer.
However, this is not a problem just for Shell. We can see that BP is lagging behind even more. In fact, Exxon Mobil and Chevron – plus most other major US oil stocks - demand a sizeable premium compared to European peers that are trading at much lower multiples. It is worth flagging that BP and Shell are not only cheap compared to their US counterparts, but the wider market in general – both of them are among the most inexpensive stocks in the FTSE 100 at present.
Read more: Are the FTSE 100 and UK stocks undervalued?
Shell: Returns first, clean energy second
So, why are US oil giants demanding such a premium? Well, one reason the likes of Exxon Mobil and Chevron have outperformed Shell and BP is because they have stuck more religiously to their money-making fossil fuel operations at a time when others across Europe have been spending large sums transitioning to cleaner energy. That has led investors to favour American firms still returning significant sums to shareholders at the expense of European firms spending more money on net-zero targets and therefore returning less to investors.
This is reflected in the fact that Shell said it would continue to invest in its gas business that was the primary driver behind its record profits last year and keep upstream output stable between now and 2030. That marks a shift in strategy considering the oil giant had previously said it would look to trim output by 1% to 2% each year through until the end of the decade.
Former CEO Ben van Beurden initiated the plan to gradually cut upstream output this decade back in 2019 with a view of output being some 20% lower by 2030. But it is important to consider that that output has already fallen much faster than anticipated and is already much lower since 2019 thanks to divestments. That means Shell had more leeway to announce this week that it plans to keep production flat for the rest of this decade while sticking to its longer-term climate goals, with the firm reiterating its commitment to becoming net-zero by 2050.
CEO Wael Sawan said the current transition risks dismantling the current energy system we all rely upon quicker than it can build the new one based more around clean energy, which is prompting Shell to have a rethink. The bottom-line is, Shell is no longer willing to pursue any projects that don’t generate a sufficient return, regardless of what it means for its climate goals. ‘We are making choices, questioning projects and assets with one goal in mind: every single part of our business needs to help us deliver more shareholder value.’
He has promised all future projects will go through a ‘ruthless’ evaluation when it comes to returns. Shell has already taken action on this front, having announced it will exit its business that supplies energy to households in the UK this year due to the poor returns on offer and telling those that runs its renewable energy division that returns need to be a bigger priority.
Shell stock: the bottom-line
Today’s update is positive, even if it wasn’t as positive as some investors had hoped. Sawan, who took over at Shell at the start of this year, has unravelled some of the actions taken by his predecessor and Shell is now putting returns back atop its list of priorities and sharpening its focus on profitability by reducing costs and putting all its projects through rigorous financial evaluation.
Lower costs and spending, twinned with faster growth in shareholder distributions, is good news. The job now is to execute and show investors that it’s a reliable source of cash by accelerating the recovery in its dividend and maintaining momentum with share buybacks – and putting its net-zero goals behind returns will help.
One metric to watch is the valuation gap between Shell and its US rivals. Signs that it is closing would suggest Shell is making progress and restoring confidence in the markets. If the gap remains the same or, god forbid widen, then Sawan’s ambition to catch up may be faltering.
Where next for the Shell share price?
Shell shares have formed a symmetrical triangle since March, having formed lower-highs and higher-lows that are set to gradually converge. We are looking for it to break out to signal what direction it could head next.
A break above the pattern could see the share price rocket back toward 2,600p, marking the near four-year high we saw back in March. It could reclaim the previous peaks in the meantime, making 2,400p and 2,450p levels worth watching on the way up. If it does climb back to those highs, we could see the stock then resume the rising trend that can be traced back to June 2022.
Notably, trading volumes have been above the 100-day average over the past three sessions, during which it has climbed higher. Brokers see over 33% potential upside from here considering the average target price sits at 3,090p – which, if achieved, would mark all-time highs for the oil giant.
If it breaks below the pattern, then the stock could sink to the June-lows of 2,220p before heading toward the 2023-lows of 2,174p.
FTSE 100 analysis: Where next for the index?
Shell is one of the biggest components of the FTSE 100, carrying a weight of over 8%. That means movements in Shell’s share price can be influential on how the blue-chip index performs.
The index has risen for three consecutive sessions but continues to drift between a ceiling of 7,650 and the June-low of 7,452. We are waiting for the index to break out of this range to decide where it is headed next.
A break above the ceiling would mean a move toward 7,710 is possible, marking the level of support that held throughout most of May. A move below the June-floor risks seeing it fall toward 2023-lows at around 7,307.
