Cash-rich Shell a tough act to follow

Shell today reinforced its status as one of Europe’s best-placed Big Oil companies by hiking its dividend and stretching its record of $3 billion (£2.4 billion) or more of buybacks to a 13th quarter.

The latest distributions follow a year in which the oil giant generated free cash flow of $39.5 billion, an increase on 2023’s level despite lower energy prices.

The results have set a high bar for the rest of the industry, given speculation in the City that some of Shell (LSE:SHEL)’s European rivals will struggle to sustain their distributions in 2025.

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Improved cost and operational efficiencies as well as constrained capital expenditure meant that Shell cut its net debt by $4.7 billion in 2024. It returned $22.6 billion to shareholders in the last year, representing 41% of the cash flow from operations in the period.

Shell kept its buyback unchanged at $3.5 billion for another quarter and increased its dividend per share by 4% to 35.8 US cents (28.71p). This will be paid on 24 March, with the sterling conversion based on the exchange rate on 10 March.

The latest results-day example of Shell’s financial firepower meant shares reached mid-afternoon 38p higher at 2633p, despite fourth-quarter earnings below forecasts.

Net income of $3.7 billion missed City estimates by about 11%, partly due to trading in the chemicals and products segment and seasonal demand headwinds in Marketing.

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In contrast, cash flow from operations of $10.8 billion was 9% ahead of the consensus. Capital expenditure of $6.9 billion compared with a run-rate of $4.5 billion earlier in the year.

This left organic free cash flow at $3 billion in the fourth quarter, which compares to dividends and buybacks running at $5.7 billion. 

However, Morgan Stanley said the seasonality in capital expenditure is not unusual in Shell's history and that the full-year figure is low relative to initial guidance.

The bank has an Overweight recommendation and target price of 3,050p, having recently backed Shell as the only major for which it comfortably models excess room in its financial framework.

It said this month: “We expect that BP (LSE:BP.), TotalEnergies SE (EURONEXT:TTE), Eni SpA (MTA:ENI) and Equinor ASA (XETRA:DNQ) will all distribute lower dividends and buybacks in 2025 than 2024, but this is not our expectation for Shell.

“To add to this, even if Shell maintains its $3.5 billion quarterly buyback, net debt continues to fall – unlike others, where we assume lower distributions.”

Under chief executive Wael Sawan, Shell has focused on internal reorganisation, portfolio pruning, cost efficiency and capital discipline. 

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The strategy has been deemed a success after Shell delivered earnings consistently ahead of expectations and without the levels of volatility seen at rival BP.

Shell is due to hold a capital markets day on 25 March, when Sawan is likely to place the emphasis firmly back on upstream oil and gas and growing the share of earnings from trading.

Morgan Stanley added recently that continued support for buybacks and further balance sheet de-gearing would make the equity story “hard to beat, especially if we are correct that the commodity price environment will be somewhat modest”.

BP is due to report fourth-quarter results on 11 February, with TotalEnergies scheduled for 5 February.