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| Share Name | Share Symbol | Market | Stock Type |
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| Shell Plc | RDSA | London | Ordinary Share |
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| 0.00 | 0.00% | 1,895.20 | 00:00:00 |
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Posted at 12/1/2022 14:42 by waldron seeking alphaMorgan Stanley's 2022 outlook for European oils -- bullish Jan. 12, 2022 8:50 AM ETBP, EQNR, TTE, E, RDS.A, USO, CO1:COM By: Nathan Allen, SA News Editor Rise in gasoline prices concept with double exposure of digital screen with financial chart graphs and oil pumps on a field. Morgan Stanley's commodities strategist and head of European oils, Martijn Rats, is out with a note this morning detailing his view of the year ahead for European energy - he remains constructive, with many of the factors contributing to 2021 outperformance driving repeated outperformance in 2022. Starting with the commodity, the Bank sees Brent oil prices (CO1:COM) (NYSEARCA:USO) hitting $90 a barrel later this year, as low inventories, low spare capacity, and low investment drive prices higher; the bank assumes an average Brent price of $78 in 2022. Improved cash flow management will lead the five European majors (Total (NYSE:TTE), Equinor (NYSE:EQNR), Shell (NYSE:RDS.A), Eni (NYSE:E), BP (NYSE:BP)) to generate $76b in free cash flow during 2022, or ~14% of their combined market caps -- this is double what these companies generated in all of 2011-2014, when Brent was above $100. The bank anticipates a rotation out of growth stocks, into value stocks during 2022, and thinks energy will be a direct beneficiary, given the compelling 14% free cash flow yield and average 8% shareholder payout. Finally, Mr. Rats thinks the ongoing energy crisis could change perceptions about the industry, driving investors to reconsider the "benefits" of divestment. Top pick remains Shell (RDS.A) given his view that the dividend will rise faster than the market expects (and faster than Management has guided); additionally the market will begin to ascribe value to Shell's ability to allocate capital to the energy transition. ENI (E) is also buy rated, given the potential to unlock value as the Company plans to partially list its retail and renewables businesses; the dividend framework also ties payouts to the oil price, which leads to a ~7% yield in Morgan Stanley's forecast. The focus on Shell is in-line with most Wall Street peers, as robust free cash flow, gas-heavy commodity exposure, and underperformance have earned the stock several buy ratings into 2022; Eni however, is a non-consensus pick and will be interesting to watch as the year unfolds. |
Posted at 06/12/2021 06:05 by waldron While Shell Resists Breakup, Rivals See Opportunity From SpinoffsItaly's Eni and other European energy conglomerates are spinning off parts of their low-carbon energy assets or considering such moves to boost returns published : 6 Dec 2021 at 04:30 writer: Ben Dummett THE WALLSTREET JOURNAL Royal Dutch Shell PLC is standing firm against Third Point LLC's call for a breakup of the oil giant to retain and attract investors. But that isn't stopping Eni SpA and other European energy conglomerates from targeting similar moves to boost shareholder returns. Shell has defended its integrated strategy by saying its legacy oil-and-gas assets are needed to fund its investments in lower-carbon energy. But Daniel Loeb's Third Point says the structure is too unwieldy to value Shell. Instead, the U.S.-based activist suggests the company, which plans to consolidate its dual British and Dutch structure and relocate its headquarters to London, should consider separating its legacy operations from its renewables investments to boost returns and accelerate carbon-dioxide-emiss The standoff shows the challenges energy companies face maintaining their record of dividend payouts while managing the more recent pressures of reaping full value for their increasing investments in green energy. Eni's solution: spinning off a minority stake of its retail energy and renewables business next year through an initial public offering. The move isn't as extreme as the breakup Third Point is pushing for at Shell, but the aims are similar: Simplify the company's structure, in this case, to attract a higher valuation and a lower cost of capital. That will allow the spun-off company to raise money more cheaply to expand the alternative energy business as more investors bet on growing demand for low-carbon assets over fossil fuels like oil and gas. Analysts and investors say it is too early to know if Eni's IPO strategy will succeed over the longer term. It has paid off so far, with the stock outperforming Shell and other European rivals BP PLC and TotalEnergies SE since the plan's approval in October. The move by Rome-based Eni "is a potential experiment for the rest of the sector, and if investors are receptive, we expect others to follow suit in the coming months and years," said Biraj Borkhataria, a London-based analyst at RBC Capital Markets. Spain's Repsol SA is another major oil producer considering splitting out its low-carbon assets, and it is expected to make a decision next year. Spanish electricity utility Iberdrola SA in July indicated it may list part of its offshore wind-farm business in an IPO. Eni's renewables business oversees a network of wind-farm and solar-power projects across parts of Europe, the U.S., Asia, Australia and Africa. The company aims to expand its installed capacity of renewable energy to 60 gigawatts in 2050 from 1 gigawatt last year. That business's potential value suffers because it is dwarfed by the company's lower-growth traditional oil-and-gas business, measured by operating profit. Eni's enterprise value trades at 3.5 times to its estimated earnings before interest, taxes, depreciation and amortization, according to S&P Capital IQ. By comparison, Denmark-based wind-farm operator Oersted A/S and U.S. alternative energy giant NextEra Energy Inc. each trade around 16 times that profit measurement. Eni didn't disclose a valuation target for the new business when it detailed financial forecasts for the new company on Nov. 22. Eni's shares have risen 3.6% since the IPO announcement, while Shell's have declined 1.3%, France's TotalEnergies has slipped 0.8% and BP is 1.2% lower. The recent outperformance of Eni's shares relative to its peers shows that the spinoff plan has played a central role in the stock's strength, said Giacomo Romeo, an analyst at Jefferies International. Spanish infrastructure and energy company Acciona SA has already demonstrated some of the benefits of a spinoff. In July, it listed a minority stake of its business that builds and operates wind- and solar-power projects. Corporacion Acciona Energias Renovables SA trades near 25 times its projected earnings estimates, above the parent company's multiple of 22 times. By spinning off low-carbon assets, integrated energy companies create businesses that can appeal to institutional investors like the Ford Foundation and Dutch pension fund Horeca & Catering. These institutions are part of a growing number that are ending investments in fossil fuels or selling assets to help reduce global warming. In September, Horeca & Catering sold out of its €250 million, equivalent to $283 million, worth of fossil-fuel stocks including Eni, Shell, BP and Exxon Mobil Corp. The fund, which oversees €16 billion in assets, would still be allowed to consider investing in Eni's low-carbon business following its spinout into a separate publicly traded company. That assumes any revenue from oil and gas was less than 50% of the total, said Bas van Ooijen, a senior investment manager at the fund. The Ford Foundation said a month later it planned to end fossil-fuel investments and that the move could undermine future returns. Horeca & Catering said its analysis shows no significant difference in its overall returns over the long term whether oil-and-gas stocks were included or excluded from its portfolio. "There will be more cases where [integrated] companies will see an issue between what independent [alternative energy] players are valued at and the value of their low-carbon assets, especially as these businesses grow,'' said Mr. Romeo, the analyst at Jefferies. |
Posted at 16/11/2021 16:24 by waldron Shell Changes: What Should Investors Do?Royal Dutch Shell is proposing to turn its back on the Netherlands and create a single share class in London, but what does that mean for investors? James Gard 16 November, 2021 | 3:32PM UK investors wanting to trade shares in Royal Dutch Shell have for years been faced with the dilemma of which one to choose. Unusually, the company trades on the FTSE 100 with two tickers, and is the only stock to do so. But many would struggle to explain the difference. Now, under plans put forward by the oil major, these two share classes could become one as the company ditches the “Royal Dutch” and moves its headquarters to London. The move comes just weeks after activist investor Third Point revealed plans to split Shell up, though it hadn't specifically proposed this latest course of action. The current set-up is quite complex and the aim is to simplify this. At the moment, Shell trades under tickers “RDSA” and “RDSB”, with the “A” shares subject to a 15% tax on dividends imposed by the Netherlands; “B” shares don’t, and are the ones usually favoured by UK investors, and trade at a (modest) premium to the A shares.(The A shares, on November 16, were at £17.05 and the B shares stood at £17.09.) “A” shares pay out in euros and “B” shares in pounds sterling, although the figure quoted is $0.24 for the latest quarter. By having a single pool of ordinary shares, Shell hopes to speed up its plans to buy back shares, which is one of the planks of its post-pandemic appeal to shareholders. This matters a lot for income investors because Royal Dutch Shell pays out billions to shareholders like DIY investors, funds and pensions. In 2020, Shell cut its dividend for the first time since World War II, but has been trying to play catch-up since with raised dividends and share buybacks. Buybacks reduce the number of shares in issue, with the aim of boosting the share price, and are currently in fashion among large FTSE income payers like WPP and Unilever. We wrote about the trend in our recent top FTSE dividend round-up and we plan to cover the topic in more detail this week. Climate Pressure More dramatic changes than a tidying up of the share structure are afoot. As the name suggests, Royal Dutch Shell has roots in the Netherlands and UK. Its headquarters is currently in The Hague but the shares are listed in Amsterdam and London. Under the plans, Shell will have its HQ in London, while its chief executive and chief financial officer will move here too from the Netherlands. Crucially, Shell will move its tax residence to the UK, where ministers have received the news as a “vote of confidence” in British business. Unilever, another company with Anglo-Dutch roots, threatened to go in the opposite direction and shift its base to the Netherlands – but reversed this after a backlash from big UK shareholders. The Dutch government is understandably not delighted by the news, describing it as an "unwelcome surprise". Cynics might say Shell’s decision is not unrelated to the legal pressure the company is under in the Netherlands, where a court ruled its emissions cutting targets are not strict enough. As Morningstar oil analyst Allen Good explains, though, this move is “unlikely do anything to shield the company from recent lawsuits over emissions”--su What should investors in Shell do? Naturally, they will be asked to vote on the proposal, which requires at least 75% of shareholders to support it to go ahead. Morningstar’s Good says the proposals won’t have an impact on the company’s valuation. It retains its no-moat rating – downgraded from narrow – and has a 3-star rating. Shares have risen 35% this year as oil prices have soared, but Morningstar still values them at £19.40, above the £17 level they are trading at now. Shell claims a simpler structure will help make its climate transition progress smoother, but Good says the move is unlikely to have any meaningful impact. |
Posted at 01/11/2021 08:02 by waldron More Shell Shareholders Voice Out Opposition to Third Point's Breakup Proposal11/01/2021 | 05:02am GMT (MT Newswires) -- Royal Dutch Shell's (RDSA.L, RDSA.AS) top shareholders are poised to reject Third Point's proposal to split the company, The Telegraph reported Oct. 29. The shareholders said separating the Dutch oil and gas major's oil and renewable businesses may negatively impact the company's climate change plan. One institutional investor that owns a comparable shareholding in Shell to Third Point's $750 million stake said the plan may hit the cash flow required for the energy transition. "Maybe what they are thinking is that you can put a big fancy multiple on the renewables business. That doesn’t help the business. That doesn’t help the end goals of decarbonizing the energy system," the investor said. The statement follows top 10 investor Abrdn (ABDN.L) manager Iain Pyle's comments that Third Point's proposal could be difficult and unrewarding and Shell's integrated operations could make it difficult to execute and too complex to add value for investors. |
Posted at 30/10/2021 21:00 by sarkasm Oil Majors Won’t Come Running to Help World Facing Energy CrunchKevin Crowley and Laura Hurst, Bloomberg News (Bloomberg) -- The world’s biggest energy companies are producing the most cash in years, but don’t expect them to spend it on bringing on fresh supplies of oil and natural gas to combat shortages in Europe and China this winter. Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. confirmed this week that, for the most part, they’ll spend their windfall profits on share buybacks and dividends. Capital expenditures will rise next year, but the increases come off 2021’s exceptionally low base and within frameworks established before the recent surge in fossil-fuel prices. It’s a step-change from previous energy rallies, such the early 2010s when emerging U.S. shale plays and fears over fossil fuel shortages prompted a massive upswing in capital spending. That boom ended painfully for the industry, with overproduction and a lack of cost control. This time around, Big Oil appears content to take the cash and hand it over to shareholders, who are both weary of poor returns over the last decade and concerned about the companies’ significant climate risk. “It’s not so long ago they got creamed by prices collapses so it’s not surprising they’re a bit gun shy on capex,” said Stewart Glickman, a New York-based analyst at CFRA Research. “It’s almost like they’re stuck between two extreme populations — the ESG crowd and cash-flow hungry shareholders.” Producers can satisfy both groups by simply not ramping up spending on fossil fuels. But that’s bad portent for consumers crying out for more supply. Europe and Asia are currently competing for natural gas, sending prices to record levels, while the U.S. and India have asked OPEC+ to produce more oil. China has called on state-owned companies to secure energy supplies at any cost. Chevron is perhaps the best example of a company turning away from the punch bowl. The California-based oil giant generated the most free cash flow in its 142-year history during the third quarter but intends to keep capital spending 20% below pre-Covid levels next year while increasing share buybacks. Its 2022 capital budget will come in at the low-end of its $15 billion to $17 billion range, according to Chief Financial Officer Pierre Breber, some 60% below 2014 levels. Low-Carbon Pivot “Over time the vast majority of the excess cash will return to shareholders in the form of higher dividends and the buyback,” he said Friday on a conference call with analysts. Even Exxon, until last year the poster child for doubling down on fossil fuels, is now more reticent with its cash. The Texas-based energy giant announced a surprise stock buyback Friday and locked in long-term annual spending in the low $20 billion range, a cut of more than 30% from before the pandemic. Furthermore, almost 15% of Exxon’s budget will go toward low-carbon investments, a significant departure from its previous strategy and just months after activist investor Engine No. 1 persuaded investors to replace a quarter of its board. The clean energy spending provides “optionality and builds resiliency into our plans,” CEO Darren Woods said. Shell -- which faces pressure from an activist investor as well after Dan Loeb’s Third Point LLC revealed this week it took a stake in the company -- is even more reluctant about spending on its traditional oil business. Less than half of its capital spending will go toward oil, with the bulk directed at gas, renewables and power. “We will not double down on fossil fuels,” Shell CEO Ben Van Beurden said this week. |
Posted at 04/10/2021 08:27 by waldron Fuel crisis: City traders circle BP and Shell as they take positions for more price hikes10/04/2021 | 08:31am BST Investors are not banking on a swift resolution to the UK fuel crisis against a backdrop of continuing queues on forecourts and the Army being put on standby to help with deliveries, according to data shared with City A.M. this morning. Analysis of investor movements with regards to BP, Royal Shell and Glencore shows that investors are increasingly bullish on these stocks as they expect prices will rise further, following their recent strong performance that was partly driven by the UK fuel crisis. Soaring natural gas prices and concerns over possible winter shortages have motivated a number of investors to position accordingly, trading house GraniteShares shared with City A.M.. Figures for the past week show Royal Dutch Shell has seen the volume of funds traded rise by 19 per cent, while the volume traded in Glencore is up 45 per cent. “The oil giants and Glencore have benefited recently from optimism about rising commodities prices and the UK fuel crisis,” said William Rhind, founder and CEO at GraniteShares. “It would appear that investors don’t see an end to that any time soon and are positioning themselves for higher prices,” he said. The post Fuel crisis: City traders circle BP and Shell as they take positions for more price hikes appeared first on CityAM. |
Posted at 21/9/2021 18:21 by waldron Shell investors get surprise $7-billion payout after Permian shale dealThe world's top oil producers and U.S. shale explorers have increasingly focused on shareholder returns over growth, following years of expansion Author of the article: Bloomberg News Lynn Doan, Kevin Crowley and Laura Hurst Publishing date: Sep 21, 2021 • 5 hours ago • 2 minute read • Royal Dutch Shell Plc shareholders will get an unexpected US$7-billion payout after the company promised to give them three quarters of the proceeds from the sale of Permian shale oil fields to ConocoPhillips. The cash pledge comes less than two months after Shell raised its dividend by almost 40 per cent and started US$2 billion of share buybacks. It’s more evidence that the energy giant is working hard to regain the faith of investors after making a historic cut to its payout last year in the depths of the COVID-19 pandemic. “For investors elsewhere, a divestment immediately allocated into a buyback to the tune of US$7 billion, with balance sheet strengthening on top, is rare,” analysts from Bernstein Research said in a note. It “proves without any doubt that Shell are focused on winning shareholders back.” Shell’s B shares jumped 3.2 per cent to 1,477 pence at 8:07 a.m. in London. Of the US$9.5 billion Shell will receive from Monday’s sale of the Permian, US$2.5 billion will go toward debt reduction. For the remainder, “the base case is for that to go as share buybacks,” Wael Sawan, Shell’s upstream director, said in an interview after the deal was announced on Monday. The final decision will be made by the company’s board, likely in the fourth quarter when the transaction formally closes, he said. The US$7 billion payout will be in addition to the company’s prior pledge to distribute 20 per cent to 30 per cent of cash flow from operations to investors, Shell said in a statement. The world’s top oil producers and U.S. shale explorers have increasingly focused on shareholder returns over growth, following years of expansion. Oil prices near the highest level in three years have provided them with abundant cash to do that. “Being able to transact with a healthy, robust oil price compared to where it has been in the last few years, and in a market that is hotly consolidating at the moment, is a prudent opportunity for us to grab,” Sawan said. The deal gives Shell the equivalent of more than a decade’s worth of cash flow from the Permian assets, he said. |
Posted at 13/9/2021 19:03 by waldron Are Investors Undervaluing Shell Oil (RDS.A) Right Now?Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Neverthe... By Zacks Equity Research September 13, 2021 You're reading Entrepreneur United States, an international franchise of Entrepreneur Media. The proven Zacks Rank system focuses on earnings estimates and estimate revisions to find winning stocks. Nevertheless, we know that our readers all have their own perspectives, so we are always looking at the latest trends in value, growth, and momentum to find strong picks. - Zacks Considering these trends, value investing is clearly one of the most preferred ways to find strong stocks in any type of market. Value investors use fundamental analysis and traditional valuation metrics to find stocks that they believe are being undervalued by the market at large. Luckily, Zacks has developed its own Style Scores system in an effort to find stocks with specific traits. Value investors will be interested in the system's "Value" category. Stocks with both "A" grades in the Value category and high Zacks Ranks are among the strongest value stocks on the market right now. One company value investors might notice is Shell Oil (RDS.A). RDS.A is currently sporting a Zacks Rank of #2 (Buy), as well as a Value grade of A. The stock holds a P/E ratio of 7.21, while its industry has an average P/E of 8.83. Over the past year, RDS.A's Forward P/E has been as high as 15.91 and as low as 7.05, with a median of 10.59. Another notable valuation metric for RDS.A is its P/B ratio of 0.90. Investors use the P/B ratio to look at a stock's market value versus its book value, which is defined as total assets minus total liabilities. This stock's P/B looks attractive against its industry's average P/B of 0.94. Over the past 12 months, RDS.A's P/B has been as high as 1.09 and as low as 0.56, with a median of 0.91. Finally, investors should note that RDS.A has a P/CF ratio of 4.17. This figure highlights a company's operating cash flow and can be used to find firms that are undervalued when considering their impressive cash outlook. RDS.A's current P/CF looks attractive when compared to its industry's average P/CF of 6.06. Over the past year, RDS.A's P/CF has been as high as 5.61 and as low as 2.50, with a median of 4.30. These are just a handful of the figures considered in Shell Oil's great Value grade. Still, they help show that the stock is likely being undervalued at the moment. Add this to the strength of its earnings outlook, and we can clearly see that RDS.A is an impressive value stock right now. |
Posted at 04/6/2021 17:26 by the grumpy old men Is Royal Dutch Shell Stock a Buy?Shell had a solid plan for the future. Or at least it did until things got a little more complicated. What should investors do now? Reuben Gregg Brewer (TMFReubenGBrewer) Jun 4, 2021 at 11:25AM Author Bio Royal Dutch Shell (NYSE:RDS.B) is one of the largest integrated energy companies on Earth. That has put it in the crosshairs of environmentalists looking to take on global warming. The company has started to do something about this issue, but it may not be enough to satisfy detractors. That could make life much more difficult for Shell and its shareholders. The big change Shell made the very difficult decision in 2020 to cut its dividend by a huge 65%. There were two reasons why the giant energy company took this step. First, drilling for oil requires a lot of capital investment, and at the time weak oil prices were making it difficult to fund spending needs. Second, the company announced plans to alter the makeup of its business, shifting toward growth in cleaner energy businesses and reducing its emphasis on oil. A smiling person in front of wind turbines. Image source: Getty Images. That second announcement was notable, as it meant that Shell had heard what investors, governments, and environmentalists were saying about reducing carbon and it was taking action. Some of its peers, notably Chevron and ExxonMobil were, and for the most part still are, dragging their feet on this front. Shell's goal is to get to net zero carbon by 2050, with interim goals of a 20% reduction by 2030 and a 45% reduction by 2035. There are a lot of moving parts to this plan, but it entails reducing oil production, increasing natural gas exposure, and ramping up investment in renewable energy. Shell is not new to the clean energy space either, so it has some expertise to build off of. The goals seem reasonable, but there's one key thing investors have to remember -- the oil business, though shrinking, is helping to fund the transition to a cleaner future. A wrench in the gears Everything seemed lined up for Shell. It had even gotten back to increasing its dividend, now having raised it twice since the cut. That was meant as a sign to investors that the company was financially strong and could be trusted to address clean energy concerns and maintain a growing dividend over time. Based on shareholder proxy voting, investors appeared pleased with the direction the company was heading. Then Shell lost a court case in Europe around its environmental impact. TOT Dividend Per Share (Quarterly) Chart TOT Dividend Per Share (Quarterly) data by YCharts The big takeaway from the case is that Shell was told to increase the pace of its clean energy transition. The court mandated target for carbon emission reduction was 45% by 2030. That pushes forward the 2035 goal by five years, but means more than doubling the carbon reduction originally planned for 2030. This is a massive change. The company responded by outlining the steps it has taken so far and plans to take in the future. And by saying it will appeal the decision. That is the logical step for Shell, but investors need to consider what happens if it loses this fight. Most notably, it will likely have to divest more oil assets to meet the court's mandate. That means less revenue to support the shift toward clean energy. In turn, this will probably lead to increased use of the balance sheet to fund the transition. That is not an ideal solution. What to do about it? At this point, nothing is likely to happen in the near term. However, investors looking for a long-term energy investment might want to step back here and rethink how they go about putting their money to work. This isn't to suggest that Shell is a bad company, only that the court loss raises the risks for this energy company in an unpredictable way. The best alternative right now is likely Total (NYSE:TOT), which is going down a similar clean energy path, has maintained its dividend, and has shareholder support for its transition. Alternatively there is BP, but the company's 2020 dividend cut and high leverage compared to peers are issues that some may, justifiably, find concerning. That said, be prepared, if Shell does end up losing this fight, it is likely that other energy names will find themselves facing similar problems down the line. Should you invest $1,000 in Royal Dutch Shell plc right now? Before you consider Royal Dutch Shell plc, you'll want to hear this. Our award-winning analyst team just revealed what they believe are the 10 best stocks for investors to buy right now... and Royal Dutch Shell plc wasn't one of them. The online investing service they've run for nearly two decades, Motley Fool Stock Advisor, has beaten the stock market by over 4X.* And right now, they think there are 10 stocks that are better buys. See the 10 stocks *Stock Advisor returns as of May 11, 2021 This article represents the opinion of the writer, who may disagree with the “official̶ Reuben Gregg Brewer owns shares of Total SA. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. |
Posted at 04/2/2021 22:29 by sarkasm Don't Sell ShellFeb. 04, 2021 5:24 PM ETRoyal Dutch Shell plc (RDS.A), RDS.BRYDAFRYDBF1 Comment2 Likes Summary Shell's dreadful stock price action in 2020 is coming to an end. All the bad news has been priced in and the stock offers good value now. Oil fundamentals look supportive but even with flat oil prices, Shell's financials look to be getting stronger, providing strong dividend cover. The Strategy Day on 11th February could offer a catalyst for investors to reconsider Shell as a serious Energy Transition investment option. The December 21st trading update from Royal Dutch Shell (RDS.A) largely foresaw the torrid Q4 results and 2020 full year results just released. In a nutshell, 2020 was an exceptionally challenging year for the oil major. What should Shell shareholders do? While the company is trying to reposition itself for the new energy landscape ahead, the headlines have been consistently bad for the Anglo-Dutch company. Profit warnings, write-downs, collapsing prices for oil, collapsing refinery margins, the first cut in dividends for decades, a falling share price, and finally the departure of several clean energy executives amid internal arguments over its clean energy strategy have all contributed to the bear market in Shell's stock in the last year. The 36% fall in the stock price over the last year sounds bad, but there is a fundamental truth in oil markets and that is that the cure for low oil prices is low oil prices. That’s why the weakness in the sector, the cutbacks in production and investment will cause higher oil prices going forward, as I have already pitched in a recent Seeking Alpha article on crude oil, that so far is playing out nicely. The pessimism about Shell, coupled with some positive signs on the horizon and my bullish outlook on oil in fact make Shell a very good contrarian play. The fact that December’s profit warning did not do much damage to the share price suggests that all the bad news is already priced in and indeed the stock has started to rise over the last couple of months. The Global Investor thinks this recent price action isn’t a dead cat bounce, but the start of a rally back to a fairer, higher price for Shell's stock. Oil majors have traditionally been core income stocks for many portfolios but after the first dividend cuts in decades last year, when the dividend was cut 66% it has since been raised slightly in October and now been raised again slightly some more. This gives the stock a current dividend yield of about 3.6%. What’s more, Shell is still slashing costs and capital expenditure, like the rest of the oil and gas industry, and US shale output is falling thanks to weak pricing. This suggests low prices will squeeze out uneconomic supply and help oil prices continue their recovery. And with the rollout of vaccination programs, some oil demand lost in 2020 should come back in 2021, further tightening the supply-demand balance towards higher oil prices. Another contrarian indicator is that the oil and gas industry is now hated by institutional investors, either for financial reasons or for environmental, social and governance - ESG - reasons and this has simply gone too far. The weighting of the Oil & Gas sector in the main stock market indexes is at lows last seen in the 1990s when oil prices ranged from $10-$20 per barrel. Risks This brings us to the risks of owning Shell right now. ESG is a new force in the markets, so some investors simply won’t look at Shell for a long time. Long-term oil demand has probably peaked and the switch to renewable sources of energy will be bumpy as the company is finding in its transition efforts to date. Shell also has the risk that it gets stuck with “stranded assets” with its large reserves of oil and gas. This means Shell’s book value is bound to be higher than its market value as investors price in further write-downs to its asset values. Shell has traditionally been a very reliable dividend payer, but the energy transition makes it almost impossible to balance the needs of high dividend payouts with the large investments required in greener energies. While the dividend has been cut deeply to a lower level, investors cannot assume it will rise back to its previous level quickly as the volatility in energy markets and the restructuring needs of Shell will probably dictate otherwise. Indeed, Shell's management has called it a dividend "reset". The future It is expected that Shell will outline a radical new strategy at its investor day scheduled for February 11th. The new strategy, likely to focus on clean energy, and to more closely follow BP’s radical restructuring plans that started last year, could appeal to investors who are looking more at the rate of change in ESG factors than in the absolute level of how good a company is on current ESG measures, specifically with respect to climate change and carbon emissions. Strategy Day on February 11th Ultimately, The Global Investor expects Shell to try to strike a balance between driving meaningful change towards 'Net Zero' emissions but also to maximize value from existing businesses over the intermediate period. The following are some of the topics I expect Shell to cover in the forthcoming Strategy Day which I expect to help turn market sentiment back towards Shell’s favor. Net zero by 2050 or earlier – Shell already outlined this target back in April last year but didn’t give much detail and so wasn’t seen as that credible. Shell will probably present its business plan in more detail to get to these targets. Upstream oil & gas to underpin cash generation. Having made the mega acquisition of gas major BG Group back in 2016, Shell is more committed to oil & gas than BP who have outlined plans to cut production by 40% over the next decade. Given Shell's project pipeline, its portfolio still has some growth potential but during last year’s Q3 results CEO Ben van Beurden said "It’s probably fair to say that 2019 was the high point in terms of oil production". So Shell is probably keen to keep a relatively flat production profile as it looks to sell non-core positions as it uses its Upstream division to act as a key contributor to cash generation over the next decade, through both operations as well as disposals. While this might disappoint ESG investors who argue for more aggressive action, it will keep dividend investors happy as this strategy reduces risks to free cash flow generation. Strength in natural gas, the bridge fuel. Shell is the world’s largest player in LNG so it’s likely Shell will highlight the role of natural gas as the “transition fuel” helping reduce carbon emissions because of its cleaner properties compared to coal and its vital role in electricity generation. The term "bridge" comes about because natural gas can support renewables over the period where wind and solar still suffer from intermittency issues. In 2019 Shell said it expected the LNG market to grow at 4% per year over the next few years. Last year management said Shell’s LNG business will not necessarily match the market "percent for percent" which might mean lower capex needs in this division. LNG will remain a key cash generator over the next decade so expect updates on Shell’s LNG outlook on 11th February. Growth opportunities in hydrogen and biofuels. For renewables, Shell will likely emphasize both hydrogen and biofuels given hydrogen is a natural fit as it is already produced and consumed in Shell’s refining business. Shell already has about 50 hydrogen fueling stations mostly in Germany and California. In biofuels, Shell is one of the largest blenders and distributors globally, partly due to its 50:50 joint venture with Raizen in Brazil. Shell will likely highlight its expansion in wind and solar, businesses which are getting extremely competitive now. Shell will look to leverage its strong Marketing and Trading positions to sell more electricity to the customers who currently buy fossil fuels from their large global customer networks. New Energies to account for about 25% of capital expenditure over the next few years. At last year’s 3Q earnings announcement, Shell guided that capex would remain in the $19-22 billion range over the coming years. It gave high level guidance on the breakdown between segments: 35-40% for Upstream, 35-40% for “Transition business”, which includes Integrated Gas, Chemicals and Refining, and about 25% to growth businesses such as Marketing, Power, Hydrogen, Biofuels and carbon capture, utilization and storage with nature-based solutions. The Global Investor expects Shell to update this breakdown and give more detail. Overall, hydrocarbons will remain part of Shell’s core strategy over the next decade. This gives it less execution risk on restructuring compared to its great rival BP, but makes it more exposed to oil and gas commodity prices. While ESG investors do play a role at the margin, and maybe a larger role in Europe, The Global Investor still believes the stock market is overall, at least in the long term, amoral. Short term trends matter and ESG has driven investors away from oil & gas but it could also be argued that that’s mostly happened because of weaker financial returns in the sector. If Shell can raise its profits through higher oil prices, Shell can raise its dividends and investors will put a higher valuation on the stock because of higher dividends. Dividends So, it comes back to dividends ultimately. That has always been the driver of Shell’s share price. Assuming oil prices at about $50/bbl over the next few years – more conservative than my actual view – I think Shell will generate $13-14 billion in free cash flow each year. At current dividend levels this implies dividend cover of about 2.5x, a very high number for Shell historically. This means Shell's balance sheet will start to de-leverage quickly. Management has indicated that when net debt falls to about $65 billion it will re-start its share buyback program. This could happen around the middle of next year if oil prices hold. Currently, Shell is guiding for 4% dividend growth per year, but there is big upside potential to this number. Before the dividend reset last year, Shell’s dividend had become unstainable given the investment needed in the energy transition. Valuation Shell’s dividend yield over the last 10 years had bounced around the 6% level as it was always assumed the dividend was unstainable. After the reset a much lower more sustainable dividend yield would be more like 3.5% or 3.6%. Taking 3.6% to be conservative, and a forecast full year 2022 dividend of $1.39 per share for the “A” class ADRs would give us a stock price of about $39, or about 6% higher than where it is at the time of this writing. While this isn’t massive upside, the dividend yield of 3.6% and dividend growth of 4-5% per year offers us good stability. All this assumes conservative oil price forecasts and gives Shell ample room to de-lever and increase share buybacks or accelerate dividend growth, which should further put a bid on the stock price. Conclusion Value investors and income seekers should continue to own Shell. Shell is very likely to always be a “Supermajor |
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