- Oil major abandons plans to cut production
- Plans to pay out 30-40% of operating cash flow
- Reductions in capital and operating expenditure targeted
Energy giant Shell (SHEL) has signaled a big break from its recent past by doing away with targets to cut oil production.
New chief executive Wael Sawan appears to be trying to play catch up to the company's US peers, which have never had any such plans to trim their crude output and have outpaced Shell in share price performance terms to trade on higher valuations.
The shares edged 0.3% higher to £23.03 in early trading this morning.
The company now plans to keep oil production steady until 2030 instead of cutting by 1% to 2% a year to the end of the decade.
Accompanying this shift in approach is a plan to reduce operating costs and spending and instead buy back $5 billion of shares.
Capital spending will be cut to $22-$25 billion per year in 2024 and 2025 and annual operating costs are set to come down by $2-$3 billion by the end of 2025.
RISKS TO NEW APPROACH
Shareholder distributions will be increased to 30% to 40% of the company's cash flow from operations. This means a 15% increase in the dividend for the second quarter alongside the proposed share buyback.
AJ Bell investment director Russ Mould said: ‘The move by Wael Sawan will likely be welcomed by shareholders as it puts Shell more in line with its US peers. He is signaling that renewables and clean energy projects are all well and good but they must pay their own way and if the returns projected are too weak, they won’t make the cut.
‘In principle this is good business sense, however, the situation is a little more nuanced. As the effects of climate change become more obvious, political and regulatory pressures will ramp up.
‘Already Shell is having to fight a Dutch court ruling ordering the company to cut its emissions. In the short-term, maintaining oil production undoubtedly makes financial sense but doing so exposes the company to new risks too.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author (Tom Sieber) and article editor (Ian Conway), owns shares in AJ Bell.
