Energy giant Shell (SHEL) is on a mission to play catch-up with its higher-valued US peers and investors should hop on for  the ride.

New chief executive Wael Sawan pledged laser-like focus on cash and returns at an investor day on 14 June and if he can deliver on his promises, shareholders stand to see a real benefit in the next two or three years.Sawan is adopting a more pragmatic approach to the company’s transition away from fossil fuels. He has abandoned plans to cut oil output by 1% to 2% a year out to 2030.

Based on consensus forecasts for 2024 Shell trades on a price to earnings ratio of 6.8 and offers a dividend yield in the region of 5%. By comparison, its US counterpart ExxonMobil (XOM:NYSE),
which has not made the same commitments to shifting out of hydrocarbons, is on a PE of 11.4 and yields 3.7%.

Shell is scaling back its capital expenditure, cutting its budget for 2024 and 2025 to between $22 billion to $25 billion from a previous range of $23 billion to $27 billion, and is aiming to reduce its operating costs by $2 billion to $3 billion per year by 2025.

The emphasis placed on returns means it will move away from more speculative investments in clean technologies like hydrogen and carbon capture.

All these initiatives should help underpin a 10% increase a year in underlying free cash flow per share. Investment bank Berenberg estimates Shell could generate a free cash flow yield of 12.5% at a conservative oil price of around $65 per barrel – most of which can be returned to shareholders through dividends and share buybacks.

What provides some confidence in these targets is that Shell is not in a bad shape. It has a strong balance sheet with net debt having nearly halved since the end of 2019 to its lowest level in more than a decade. It also has a leading global LNG (liquefied natural gas) business which could have a crucial role to play as the world seeks to gradually move to less polluting fuels.

Shell faces both structural and cyclical risks. Energy prices are likely to remain volatile and a global recession could hit demand. This is mitigated somewhat by geopolitical tensions which are constraining supply as well as Saudi Arabia’s recent efforts to prop up prices.

The other risk is that by seemingly backsliding on its commitment to the energy transition Shell faces an increase in political and regulatory pressure. Investors may have their own ethical concerns about this too.

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