Shell smashes profit record in boom year

The oil major is flexing its financial muscles and making more money than ever before. Our head of markets talks through the annual results and explains what it's doing with all the cash.

Following the clues provided last week by US titans Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX), Shell (LSE:SHEL) has posted record annual profits which erase the financial pandemic pain.

Full-year profits of $41.6 billion on a current cost of supply basis compare with $17.5 billion the previous year and also comfortably exceed the previous record of over $31 billion set in 2008. A combination of higher prices, trading and refining margins all helped propel the overall result, while the sheer scale of cash generation also enabled some generous spring cleaning of the overall financial position.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

The upswing in cash flow has been put to use across the sprawling group. Overall net debt has reduced to $44.8 billion from $52.6 billion a year previously, while a share buyback programme of $4 billion was also announced. An increase to the dividend puts the prospective yield in excess of 3.6%, which has been and will continue to be a healthy addition to any capital return on the shares.

The diversity of the operation also showed its mettle over the final quarter of the year, where adjusted profit of $9.8 billion compared with $6.4 billion a year previous and comfortably beat expectations of $8 billion. The result was largely enabled by the strength of the contribution from Liquefied Natural Gas, where the ongoing conflict between Russia and Ukraine has elevated prices. As such, despite a more recent falling away of the oil price (which peaked at around $120 per barrel in June 2022 and currently stands at $83), there were other parts of the business to pick up some of the slack.

Given the background of the new CEO, it may be that Shell’s transition towards renewable energy may receive additional focus. In the meantime, however, as expressed by others in the industry, the renewables market is currently fraught with challenges. Either unproven technologies or simply unprofitable forays thus far are making progress difficult. Indeed, for the full year Shell’s loss in the renewable space was $1.06 billion, even if this did represent an improvement from $1.5 billion the previous year.

Even so, Shell is able to absorb these developmental losses with ease, especially if the business remains underpinned by a relatively strong oil price. The financial largesse which the group has been able to display in terms of both shareholder returns and further investment in the business generally is something of a reminder that, while oil is of course a finite resource, it will remain on the scene for some considerable time to come in the absence of other viable alternatives.

The fluctuating opinions surrounding demand from China following its reopening will continue, and there could also be bumps in the road should even a mild global recession ensue from the current round of aggressive central bank policies in hiking interest rates. This could potentially lead to a weakening of demand, although recent history tends to suggest that the controlled supply of oil is an alternative which is used to stem any sustained falls.

• 10 shares to give you a £10,000 annual income in 2023
• UK bank shares: what you must know ahead of annual results this month
• This is what the ideal share for 2023 looks like
• 2023 Investment Outlook: stock tips, forecasts, predictions and tax changes

Shell has once more flexed its financial muscles on a massive scale, while riding the waves of an economic cycle which can bring major challenges as well as rewards. The share price may have dipped by 4% over the last three months (by comparison the oil price is down by 3% in the year to date), but the total return for shareholders has been impressive.

Over the last year, the shares have added 22%, as compared to a gain of 2.3% for the wider FTSE100, and the market consensus of the shares as a 'buy' is reflective of Shell’s ongoing position as an important constituent of most investor portfolios.