Shell remains core investment play after Q3 profits beat

All things considered, Shell (LSE:SHEL) remains a core investment play, with the sheer scale and size of its operation continuing to underpin its strength.

Given the weaker numbers reported by BP (LSE:BP.) earlier in the week and a languishing oil price, expectations were not high going into these results.

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Shell’s adjusted earnings for the third quarter of $6 billion compared with $6.29 billion the year before, although that was well ahead of the estimated $5.36 billion. Beneath the headlines, there were meaningful contributions from the Upstream division (exploration and production (E&P)), where adjusted earnings of $2.44 billion were above the expected $1.99 billion and from the Integrated Gas unit, whose $2.87 billion of adjusted earnings sailed past expectations of $2.62 billion.

Elsewhere, the Renewables segment has yet to be profitable, with an adjusted loss of $162 million for the quarter reported. Even so, this represents an improvement from the $187 million loss reported in the previous quarter and the fortunes for the unit given the current backdrop remain under scrutiny.

While this part of the business remains in relative infancy, the market remains fraught with challenges. Either unproven technologies or simply unprofitable forays thus far are making progress difficult, while Shell’s decision to dial back on climate change friendly investments last year received a mixed response.

The weaker oil price has had an inevitable effect on refining margins, which have slipped lower both for the quarter and in the year to date, and the uncertain economic environment globally has left the demand situation unclear. China, for example, is grappling with its own economic challenges despite having announced several stimulus measures, while higher interest rates and generally higher costs for businesses all feed into the mix. At the same time, the industry is the focus of some debate from an environmental perspective, with the ever-increasing possibility that some investors will be unwilling or unable to invest in the sector on ethical grounds.

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However, the company’s extraordinary cash generation, despite the lower earnings, has enabled the dividend to be maintained at a yield of 4.2% which provides some attraction to income-seeking investors. In addition, Shell has announced yet another share buyback programme of $3.5 billion as expected, to be completed on the coming quarter.

Quite apart from these shareholder distributions, the group has also found enough financial firepower to continue working on net debt, where the current figure of $35.2 billion compares with $40.5 billion in the corresponding period and with $38.3 billion in the previous quarter. 

The general external pressure also includes other concerns, such as windfall taxes, future energy demand and usage and persistent levels of costs. That being said, the group’s diversity of operations across oil, gas, chemicals and alternatives regularly results in different areas of the business picking up the baton as others face more difficult times.

Of course, Shell’s shares are inexorably linked to an oil price which has fallen by 5.5% this year, despite the uncertainties arising from the ongoing conflict in the Middle East. Ample supply and weakening demand from China have depressed oil price levels, which has led to Shell’s price falling by 3% in the year to date.

Over the last year, Shell shares have declined by 7%, as compared to a gain of 11.4% for the wider FTSE100, although on a three-year view the picture has been brighter, with the price having risen by 48% in an ongoing show of resilience.

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There may have been times over recent years when the old market adage, “never sell Shell”, may have been brought into question, but for the most part the group has ridden the inevitable economic waves with aplomb.

The market consensus of the shares as a buy and the preferred play in the sector over BP shows little sign of wavering despite the difficult current climate, and is reflective of Shell’s ongoing position as an important constituent of many portfolios.