Robust 3Q performance supports boost in share buybacks
- Adjusted earnings of US$6.2bn in 3Q23 largely in line, up 22.7% over 2Q23, driven by higher oil prices and refining margins and steady gas trading results
- Cash flows remain robust, share buybacks for 2H23 boosted
- Shell share price and valuations have outperformed since June after the slight pivot back to hydrocarbon focus, even as it makes progress on key low carbon projects
- We reiterate our BUY recommendation with higher target price of GBP 35.00
Shell plc delivered a robust performance in 3Q23, with adjusted net income attributable to shareholders at US$6.2bn, compared to US$5.1bn in 2Q23. This is driven by the higher realised oil prices and refining margins in 3Q. Gas division earnings held up unlike at peer BP, with favourable gas trading results noted. Upstream earnings rose by US$0.5bn q-o-q to US$2.2bn, aided by higher oil and gas prices as well as increased production volumes. Total hydrocarbon production was 1,753 kboe/d, up 52 kboe/d compared to 2Q23. This growth was underpinned by strong project delivery and performance, especially in the deep water business. The start-up of production from the Timi gas field in Malaysia also contributed to volume growth in 3Q23. However, this growth was partly offset by declining output from maturing regions like Europe and Asia. Downstream also delivered a very strong quarter with indicative refining margins at US$16/bbl, significantly above 2Q23 levels of US$9/bbl. This upside in refining margins is attributable to lower global product supply coupled with higher demand especially for distillates. Refinery utilisation was at 84% for the quarter. Chemicals earnings however continued to be impacted by weak demand and lower realised margins. The renewables division meanwhile reported a US$67m loss, and cash flows were materially weaker as well q-o-q, owing to lower margins and lower trading results. The company overall generated healthy cash flows during the quarter, with cash flow from operations at US$12.3bn (2Q23: US$15.1bn). This enabled Shell to deliver significant cash returns to shareholders. Shell announced shareholder distributions of approximately US$23bn for 2023 through dividends and share buybacks (overall distribution yield >10%). This includes the US$3.5bn share buyback program announced for 4Q23. Actual announced buybacks of US$6.5bn for 2H23 is higher than guidance of at least US$5bn announced back in June.
Share price continues to re-rate. To recap, Shell has unveiled a new strategy back in June 2023 when it scrapped its earlier plans to cut oil output by 20% by 2030 and has decided to focus on growing its natural gas business given its status as the world’s largest LNG player and trader, in a bid to regain investor confidence amid elevated hydrocarbon price environment. However, Shell does continue to make progress on some key projects on the low carbon front. The construction on an 820,000 tonnes per annum biofuels plant in Rotterdam is nearing completion. Once operational, this plant will be one of the largest renewable diesel facilities in Europe. Shell also announced the final investment decision on the Northern Lights carbon capture and storage project in Norway, in partnership with Equinor and TotalEnergies. The first phase of this project will have capacity to capture and permanently store up to 1.5 million tonnes of CO2 per annum, with further expansion phases in the pipeline. Given the strong results and project delivery in 3Q23, we reiterate our BUY recommendation for Shell with a higher target price of GBP 35.00, based on 1.3x FY24 P/BV. The integrated company is well positioned to benefit from the current higher oil and gas price environment while also progressing on its upstream projects and low carbon investments which will support growth over the long term.