- Results exceed gloomy estimates
- Significant drop in net debt
- Fresh $3.5 billion buyback
Shares in Shell (SHEL) ticked up 1% to £25.15 after the energy giant delivered better-than-expected third-quarter results as headwinds from lower oil prices and weaker refining margins were partially offset by higher gas sales.
There was also relief as the oil major reported a quarter-on-quarter decrease in net debt from $38.3 billion (£29.5 billion) to $35.2 billion, held the dividend at 34 cents per share and announced a further $3.5 billion buyback for the final quarter.
A BEAT ACROSS THE BOARD
London-headquartered Shell’s third quarter figures beat gloomy forecasts, though a 7.1% year-on-year drop in total revenue to $72.5 billion drove pre-tax profit 36% lower to just under $7.3 billion.
Adjusted earnings weakened 3.1% to $6 billion, but this was comfortably above the $5.3 billion analysts were looking for as a strong operational performance in Integrated Gas, Upstream and Marketing cushioned the blow from lower crude prices and weaker refining margins.
Investors also applauded the bump up in third quarter free cash flow to $10.8 billion-plus, a rise from $7.5 billion in the same period a year earlier.
MORE VALUE, LESS EMISSIONS
CEO Wael Sawan said Shell delivered ‘another set of strong results. We continue to deliver more value with less emissions, whilst enhancing the resilience of our balance sheet. Today, we announce another $3.5 billion buyback programme for the next three months, making this the 12th consecutive quarter in which we have announced $3 billion or more in buybacks.’
Quilter Cheviot energy analyst Maurizio Carulli said the quarterly results were ‘much better than expectations at virtually every level’.
He observed that under Sawan’s leadership, Shell is ‘continuing to deliver on its strategy of portfolio rationalisation, cost reductions and operational improvements. A strong balance sheet, a sound asset base, both geographically/geologically (e.g. Brazil, Qatar) and segmentally (e.g. Integrated gas) support future cash flow production and dividend payments.’
In addition, Shell is ‘number one globally in liquified natural gas (LNG), a business it created from scratch since the seventies, with great foresight. LNG is the only segment of the oil and gas industry that is expected to grow substantially over the next decade, even under aggressive energy transition and decarbonisation scenarios. As such, the business has put itself in a strong position to weather any volatility in commodity prices and take advantage of competitor struggles.’
OUTPERFORMING BP
Russ Mould, investment director at AJ Bell, agreed that Shell’s long-term strategy of focusing on natural gas appears to be paying off with the integrated gas division proving the real engine of growth.
‘Shell has invested heavily in this area in the last decade or so, including through the blockbuster acquisition of BG in 2016, betting that gas could have a role to play as the world transitions away from more polluting fuels like coal or oil,’ said Mould.
‘The strength in liquefied natural gas helped make up from weak refining margins which had been flagged by the company in a teaser ahead of the results.
‘The focus under CEO Wael Sawan has been on streamlining and simplifying the business and taking a more hard-nosed approach to the energy transition. While the aspiration of keeping up with US peers is still to be met, Shell has at least outperformed its direct UK rival BP (BP.).’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
