More Dividends Come Out of Shell

Shell’s RDS.A/RDS.B third-quarter adjusted earnings improved from what was probably a trough in the second quarter but remained 80% below the year-ago level as global economic weakness caused by the pandemic continued to weigh on commodity prices. However, Shell did see a strong improvement in free cash flow generation while reducing gearing levels from the previous quarter. It also announced a 4% increase in its quarterly dividend to $0.1665 per share and introduced guidance on future shareholder returns. Future increases will be subject to board approval and dependent on further net debt reduction to $65 billion from $73.5 billion currently. Once that is achieved, Shell will distribute 20%-30% of operating cash flow to shareholders through progressive dividend growth and share repurchases. Remaining cash will go toward capital expenditures and additional debt reduction with the goal of achieving AA credit metrics through the cycle. Capex will remain at $19 billion-$22 billion in the near term with a target of $4 billion in asset sales annually.

The company plans to further focus its portfolio by reducing its refining portfolio from 14 sites to 6 by 2025, with those remaining integrated with chemicals. It previously targeted a reduction to 10. Upstream will be focused on nine core positions that contribute more than 80% of upstream operation cash flow. The remainder of the portfolio will be operated under a new lean model in which each asset is developed, managed for cash, or divested. Shell will present greater detail on its plans in February 2021. We plan to incorporate the latest results and guidance into our model but do not anticipate a material change to our fair value estimate or narrow economic moat rating.

Shell reported that third-quarter adjusted earnings fell to $955 million from $4.8 billion a year ago. Integrated gas adjusted earnings fell to $768 million from $2.7 million last year on lower realized prices and lower production volumes. Upstream adjusted earnings fell to a loss of $884 million from earnings of $833 million last year on lower oil and natural gas prices. Total company production fell 14% to 3,081 thousand barrels of oil equivalent per day from 3,379 mboe/d last year due to maintenance activities, OPEC-related restrictions, lower production from the NAM joint venture, and divestments in the upstream segment. Guidance for the fourth quarter is for higher production of 3,130-3,370 mboe/d. The oil products and chemicals segments continued to be bright spots during the quarter. Although trading results cooled off from a very hot second quarter, marketing results improved, resulting in oil products segment adjusted earnings falling only marginally to $1.7 billion from $2.0 billion. Chemicals segment earnings increased to $227 million from $224 million last year on favorable deferred tax movements.

Organic free cash flow was a bright spot during the quarter. It turned positive thanks to stronger operating cash flow after being negative in the previous quarter, increasing to $6.7 billion from $6.6 billion the year before. Operating cash flow during the quarter benefited in part from a $1.4 billion working capital release compared with a $4.0 billion build in the second quarter. Shell’s gearing ratio fell to 31.4% from 32.7% at the end of the second quarter.