Despite sky-high oil and gas prices, and repeated share buybacks, Shell (LON: SHEL) shares still remain tantalizingly close to complete pandemic recovery.

Shell share price: Q1 results

Shell recorded a $9.13 billion profit, describing its performance as ‘strong results in volatile times.’ However, this does not quite do the FTSE 100 oil major justice: this was its highest-ever quarterly profit, up 45% from the $6.3 billion it made in Q4 2021, and nearly triple the $3.2 billion profit it made in the same quarter last year.

Shell also increased its dividend by 4% to $0.25 per share, bought back $5.4 billion of shares, and plans to buy back a further $4.5 billion in the current quarter. In H2, it expects shareholder distributions to be ‘in excess of CFFO.’

And boasting a cash flow of $14.82 billion, it also reduced its net debt from $52.6 billion to $48.5 billion in just three months.

CEO Ben van Beurden enthused that ‘strong earnings and cash flow, coupled with maintaining a healthy balance sheet and continuing the disciplined delivery of our strategy, are crucial for Shell to play a leading role in the energy transition.’

However, he warned that the Ukraine war has ‘caused significant disruption to global energy markets and has shown that secure, reliable and affordable energy simply cannot be taken for granted.’

The company took a $3.9 billion hit as it continues to exit interests in Russia, including from the country’s first offshore LNG project at Sakhalin-2, as well as its stake in Nord Stream 2.

However, this sum is far smaller than the $24.4 billion absorbed by competitor BP as it offloads its 19.75% stake in Rosneft.

Where next for Shell shares?

There are four factors to consider, assuming oil and gas prices remain elevated.

First is the growing global abandonment of Russian fossil fuels. Van Beurden has warned that a complete ban on Russian gas would be a ‘major disaster’ that would leave a ‘supply hole’ in Europe. But with the UK and US committed to cutting off Russian energy, political pressure on the G7 and EU to push through a complete ban is intensifying.

Second is Shell’s commitment to invest between £20 billion and £25 billion into the UK over the next decade. 75% of this money will be spent on green tech such as EV charging points, with the rest assigned to oil and gas development, including in the North Sea. For perspective, it only made $344 million from renewables in Q1.

Shell is also ‘very close to making a few major investment decisions on hydrogen in Northwest Europe,’ including plans for a 200MW green hydrogen electrolyser in Rotterdam.

And having already switched on a smaller unit in China, Van Beurden believes Shell is the ‘ones who are making most (hydrogen) progress on the ground… our lead position we currently have may well triple or quadruple in the next few months or quarters to come.’ This isn’t just a soundbite; Shell recently spent $1.5 billion acquiring India-based green hydrogen company Sprng Energy.

Third is input from activist investor Dan Loeb’s Third Point, which has again increased its $750 million stake. The fund thinks that trying to ‘do it all,’ is leaving Shell trading ‘at a large discount to its intrinsic value.’ It continues to apply pressure in an attempt to break the company up into its constituents.

Finally, despite government hesitation, Shell could soon be hit by windfall taxes. Rivals BP, Total Energies, and Norway’s Equinor have all also reported sharp rises in underlying profits while consumers are drowning in energy bills.

Both BP’s and Shell’s CEOs have confirmed that windfall taxes would be unlikely to change current investment plans. However, Van Beurden warns that they would still have to make ‘economic sense.’ And further, he’s cautioned that ‘these types of investment levels, they do require a stable and predictable financial outlook, it does require stability of policy.’

With average energy bills already up 54% to £1,971 per year, Cornwall Insight is predicting a further 35% rise in October. Scottish Power CEO Keith Anderson has already called for a £1,000 energy bill cut for 10 million homes, arguing that ‘around 40% of UK households could be in fuel poverty this winter.’

If Shell’s profits remain elevated, the government’s current position may become untenable.

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*Based on revenue excluding FX (published financial statements, June 2020).

Charles Archer | Financial Writer, London
10 May 2022