Shell showers investors in more cash as profits keep gushing

“Shell’s third-quarter profit of $6.2 billion, on an underlying current cost of supplies (CCS) basis, meets consensus earnings forecasts almost to the dollar, although it represents a one-third drop from the same three-month period a year ago thanks to lower oil and gas prices,” says AJ Bell investment director Russ Mould.

“That healthy profit, coupled with tight control of capital expenditure, means the oil major continues to generate plenty of cash, even after $10 billion of global tax payments in the year to date, and as a result the firm is increasing its quarterly dividend and launching a fourth share buyback this year.

Source: Company accounts

“This means that total dividend payments are likely to reach around $14 billion and dividends to exceed $8 billion. That $22 billion-plus bonanza equates to more than £18 billion at current exchange rates and 10% of the current market capitalisation – a total cash yield that beats base rates on cash, ten-year gilt yields and the prevailing rate of inflation. Environmental campaigners may despair, but these numbers help to explain why Shell’s shares trade near their all-time high, even though oil and gas prices are below where they were a year ago and production growth has been relatively modest.

Source: Company accounts, Marketscreener, consensus analysts' forecasts, management guidance for Q4 2023 buyback

“Again, environmental campaigners and investors who run strict environmental, social and governance (ESG) screens will be displeased, but Shell seems to be reaping the benefits of a renewed strategic focus on hydrocarbon production, as laid down by boss Wael Sawan when he took over at the turn of the year. The goal is to maximise the value of existing assets and generate profits and cash flows which will then fund increased dividends, as well as share buybacks, and investment in low-carbon energy production.

“Shell is keeping a tight grip on capital expenditure, but it is getting more out of its hydrocarbon assets by way of production and that is helping the firm to make the most of oil prices in particular. Crude is down around 15% from where it was a year ago (and natural gas is down by some two-thirds, using Henry Hub as a benchmark) but oil is higher than earlier in 2023, thanks to strong demand, tight supply and ongoing concerns over the possible impact of the wars in Ukraine and the Middle East.

Source: Company accounts

“Accusations of profiteering from worries over energy security are not likely to go away, even if profits are down by a third from a year ago and the firm continues to pay more than $1 billion a month in tax worldwide. As a commodity producer, Shell is a price taker, not a price maker, but consumers and politicians will continue to look at how prices at the petrol pump are set and also the firm’s trading profits (although these are very hard to pin down). Shell flags trading and what it calls optimisation as a contributor to the ‘products’ sub-segment of its Chemicals and Products division, and another strong quarter is in evidence for the July-to-September period.

Source: Company accounts

“Nevertheless, hard-nosed portfolio builders, who focus more on dollars and cents, nickels and dimes rather than ESG, will welcome the cash flow, especially the dividends and buybacks. Although in the latter case it is harder for retail investors to benefit from the largesse. Buybacks tend to favour the big institutional investors, as it is quicker and easier to approach them, but the upside of the buybacks for private investors who do not get to sell to Shell is that their stake in the company goes up. Since 2018, Shell’s total share count has been reduced by a fifth (to 6.6 billion total shares outstanding from 8.3 billion).”

Source: Company accounts

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