Shell shares rise on $4bn buyback

Shell, like all the oil majors has seen a big jump in revenues and profits this year, and this is reflected in its share price which is higher today on the back of another buyback.

In Q2 Shell saw another record quarter as adjusted profits more than doubled from a year ago to a new record of $11.47bn, pushing H1 profits to $20.6bn. Integrated gas contributed $3.76bn, while upstream contributed $4.9bn to the Q2 numbers.

There was little prospect that today’s Q3 numbers would be able to match those of Q2 given the declines in both oil and gas prices since the summer, but nonetheless today’s Q3 numbers will once again hasten further calls for higher windfall taxes alongside cries of obscene profits.

Of course, as far as shareholders are concerned the story is not just about profits but also reduction in debt levels, which has seen Shell make great strides in reducing. Prior to Covid net debt sat at over $75bn, falling to $46.4bn at the end of Q2. Today’s Q3 numbers have seen that increase slightly to $48.3bn, which is a little surprising given that we were expecting a further fall.

Today’s Q3 numbers have seen adjusted profits come in at $9.45bn, slightly below market expectations, with the company announcing yet another share buyback program, this one being to the tune of $4bn, and which should be completed by Q4. The dividend is also rising by 15%.

While this move is likely to please shareholders it is likely to bring down the red mist elsewhere when it comes to what Shell is doing with its excess cash. $18.5bn in share buybacks so far year to date and a 15% rise in dividends indicates where management priorities lie, however as an exercise in PR is likely to invite a firestorm of criticism from the usual suspects, even as Shell’s effective tax rate on UK profits sits at 65%.

As in previous quarters the bulk of its profits have come from its upstream business and integrated gas business, although the gas business suffered on the back of a disappointing performance in its trading unit, with profits seeing a decline of 38% from the numbers we saw in Q2.

The company maintained its guidance on capex at between $23bn and $27bn this year, however spending on renewables continues to be tiny relatively speaking to its investment elsewhere. To some extent that makes sense given that we’ve seen decisions made to develop the Jackdaw gas field in the North Sea, as well as approving a deal in Australia to approve a natural gas field there.

In Q1 Shell spent $5bn on capex, and $7bn in Q2, however of that $7bn, only $321m was spent on renewables down from $985m in Q1. In Q3 capex fell to $5.4bn, although of that we saw renewables rise investment to just over $1bn.

The amount of profit renewables contribute to the bottom line continues to be tiny, $400m in Q3 down from $725m in Q2, however the increase in capex in Q3 is encouraging, making up 20% of overall spend in Q3.

The increased investment in renewables is encouraging, and while its unlikely to keep the windfall fanatics at bay it’s a step in the right direction.

Governments would do well to push back on additional calls for further tax rises. They may find that the additional R&D and investment they need to promote new greener and low carbon energy solutions suddenly disappears on the back of these populist calls for further tax rises.

Companies and investors require a stable investment environment when it comes to big spending commitments as well as the prospect of a decent return. Why take the risk if your profits suddenly become subject to a tax grab.