ii view: Shell faces activist call for a break-up

Below-forecast results and a new 2030 emissions target. We assess prospects for this European oil major. 

Third-quarter results to 30 September

• Adjusted profit of $4.13 billion, up from $955 million in Q3 2020
• Net debt down 22% year-over-year to $57.5 billion
• Quarterly dividend of 24 US cents, unchanged from the previous quarter

Chief executive Ben van Beurden said: “This quarter we've generated record cash flow, maintained capital discipline and announced our intention to distribute $7 billion to our shareholders from the sale of our Permian assets. 

“Today, we also set a new 2030 target to halve the absolute emissions from our operations, compared to 2016 levels on a net basis. Altogether, this is clear evidence of how we are accelerating our Powering Progress strategy, purposefully and profitably.”

ii round-up:

Anglo-Dutch oil giant Royal Dutch Shell (LSE:RDSB) today reported a significant recovery in third-quarter profit aided by a reopening of global industry from the pandemic peak. 

Adjusted profit to the end of September rebounded to $4.13 billion (£3 billion) from a Covid hit $955 million (£697 million) this time last year, although missed analyst estimates closer to $5.3 billion (£3.87 billion) given operational difficulties. 

The figures followed a call to shareholders from US activist investor Third Point for Shell to be broken up given the dilemma of investing in a company operating both in climate-damaging fossil fuels and renewable energies.   

Royal Dutch Shell shares fell by more than 3% in UK trading having almost doubled over the last year. Shares for rival BP (LSE:BP.) are up by around 80% over that time, while the broader FTSE All-Share index has gained by around 30%. 

In tandem with the results, Shell also detailed a target to halve its own absolute operational emissions by 2030 compared to 2016 levels.

Oil product sales volumes of 4.6 million barrels per day for the quarter are up 2.5% on the 4.5 million b/d figure achieved in the prior second quarter, evidencing the economic recovery. Although figures are still below the 6.7 million barrels per day achieved back in the pre-pandemic third quarter of 2019.

The dividend stayed unchanged from the prior second quarter at 24 US cents per share, with shareholder returns recently bolstered by management’s intention to distribute $7 billion to shareholders deriving from the recent sale of its Permian assets.  

ii view:

Under climate-change concerns and accelerated by the onset of the global pandemic, Shell has been focusing on lower-carbon fuels. Lower profit margins in the power and renewable energy sectors have raised the need for it to reduce organisational complexity and lower the cost base. Now US activist investor Third Point has thrown open the debate as to whether oil and renewables can sit comfortably together as an investment proposition. 

For investors, volatility in energy prices and the feed in from factors such as the weather and geopolitics offer an ongoing challenge. Concerns regarding fossil fuels and climate change now ask questions of investors under environmental, social and governance (ESG) policies operated by many institutional investors. 

On the upside, a 200% plus rise in the oil price since pandemic lows in March 2020 has boosted cash flows and allowed it to reduce net debt to a current $57.5 billion from $73.5 billion this time last year. An emphasis on shareholder returns has also been seen following 2020’s dividend cut, with a forecast future dividend yield of over 3% not derisory in the current ultra-low interest rate era. In all, and with the consensus analyst estimate of fair value sat at £19.88 per share, long-term momentum appears to remain in favour of the shares.

Positives: 

• Geographically diverse operations
• A focus on shareholder returns

Negatives:

• High competition for renewable energy assets
• The weather can raise operational challenges

The average rating of stock market analysts:

Strong buy