Shell still in (c)rude health according to Q4 update

Shell (LSE:SHEL) will continue to call on its exceptional financial firepower within a difficult trading environment.

Accompanying comments are sketchy in this fourth-quarter update, with the fine details expected to be announced at the full-year results at the end of the month. In the meantime, there is continuing evidence that Shell is facing challenges both as a trading company as well as a listed stock.

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Integrated gas production is expected to have fallen in the final quarter to between 880,000 and 920,000 barrels of oil equivalent per day, compared to 941,000 in the third quarter. Trading results are expected to be significantly lower in that unit mainly on non-cash accounting measures, while Upstream production could stabilise, with a range of 1.79 million to 1.89 million barrels of oil equivalent per day similar to the 1.81 million reported in Q3.

Meanwhile, the refining margin is estimated to remain unchanged at $5.5 per barrel, and the group has noted a $1.3 billion impact on cashflow due to payments of emission certificates in the US and Germany.

Elsewhere, the Renewables segment looks likely to remain as yet unprofitable, with an adjusted earnings loss of up to $600 million for the quarter expected, compared to $200 million in the third quarter. Given the current backdrop, fortunes for the unit remain under scrutiny, and 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.

As a stock, Shell faces the additional challenge of being in a sector which 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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Of course, Shell’s shares are inevitably and inextricably linked to an oil price which has risen by just 0.5% over the last year, and which spent much of that time at lower levels. This is despite the uncertainties arising from the ongoing conflict in the Middle East and between Russia and Ukraine, but where ample supply and weakening demand from China have taken the upper hand.

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.

However, despite all the hurdles, the company’s extraordinary cash generation means that Shell has been able to weather the storm. A dividend yield of 4.2% still provides some attraction to income-seeking investors, while the announcement of another share buyback programme of $3.5 billion in the previous quarter, to be completed in the current quarter, further underpins the price.

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

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Over the last year, the shares have added just 2%, as compared to a gain of 7.2% for the wider FTSE100, although on a three-year view the picture has been brighter, with the price having risen by 51% in an ongoing show of resilience. Indeed, there may have been times over recent years when the old market adage, “never sell Shell”, was brought into question and there is a tinge of disappointment in early trade over this update, but for the most part the group has ridden the inevitable economic waves with aplomb.

Shell remains a business which is in (c)rude health, with the market consensus of the shares as a strong buy and the preferred play in the sector over BP showing little sign of wavering despite the difficult current climate. It is also reflective of Shell’s ongoing position as an important constituent in many portfolios.