Shareholders of energy giant Shell (LON: SHEL ) – which has struggled with dividend yields in the 4% range in recent quarters – are about to be greeted with some welcome news. That’s as the energy giant’s CEO Wael Sawan signaled a strategic shift in a bid to improve investor confidence.
Announcing the new financial framework at its capital markets day on Wednesday (June 14, 2023), Sawan said Shell would increase its dividend by 15%, increase total shareholder distribution of operating cash flow to 30% to 40% (y/y). 20% – 30% rate), as well as reduce capital spending to $22-25 billion per year for 2024 and 2025.
The energy giant will also increase the size of its share buyback program in the second half of 2023 to “at least” $5 billion, up from $4 billion in recent quarters.
What does this shift mean in terms of dividends?
On 4 May 2023, Shell announced its interim dividend for Q1 2023 of $0.2875 per ordinary share, with payments in euro and sterling equivalents coming to €0.2678 and £0.2299 per ordinary share. After Wednesday’s announcement, shareholders can now look forward to payouts in the region of ~$0.33 per common share.
Additionally, an increase in share buyback rates is likely to be positive in the short term. While this is welcome news, it should be noted that despite the announced increase, Shell’s dividend payout will still be ~30% lower than it was pre-Covid in US dollars.
Of course, Shell has announced a pay cut former CEO Ben van Beurden in April 2020 it will take some time to be reversed. But investors can take solace in Sawan’s desire to gradually build the dividend payout back up and bring about a broader change in the company’s direction.
Not exactly zero pure ambition
Eyebrows have been raised in recent months when Shell, under Sawan’s leadership, abandoned several low-carbon projects including biofuels, hydrogen and offshore wind due to poor profit forecasts and medium-term return on investment estimates. So does the company discontinued its European electrical retail businessonce touted by van Beurden as a key energy transition.
So is Shell’s promise of net zero emissions by 2050 dead in the water? Not quite, if Sawan is to be believed. According to the Shell boss, the energy giant will now focus on “performance, discipline and simplification” to achieve this goal.
The company is aptly named “Powering Progress” strategy. is on the move and Sawan commented: “We are investing in delivering the secure energy customers need today and for the long term, while transforming Shell to win in a low-carbon future. Performance, discipline and simplification will be our guiding principles in how we allocate capital , to improve distribution to shareholders while enabling the energy transformation.”
Back to the “rough” basics
The market is likely to get the impression that Shell is going back to basics and not diluting the focus on its main source of revenue – hydrocarbons, and for good reason. To this end, Shell has announced that it will expand its integrated gas business as well as its market-leading liquefied natural gas (LNG) market, stabilize oil production by 2030 and expand major upstream operations.
That means it will no longer target the 1% to 2% annual cut in oil production announced in 2021, as it says it has reached its target earlier than expected. However, it will also “optimize” value from the investments it has made in downstream and renewable energy solutions, while offering and delivering low-carbon fuels and electric vehicle (EV) charging to its customers across the global transport and industrial value chains.
Investments in hydrogen and carbon capture and storage (CCS) will now be in a “disciplined manner”, while energy investments will be selectively focused on markets where Shell’s business activities can generate higher overall returns, while keeping an eye on low-carbon energy technologies. .
Finally, Shell’s energy and chemical parks will also be revamped, Singapore assets will undergo a strategic review and the high quality of European assets will be strengthened. Together, the energy giant will invest US$10-15 billion in low-carbon energy options such as biofuels, CCS, electric car charging and hydrogen between 2023-25.
Shell also reiterated its ambition to achieve “nearly” zero methane emissions by 2030 and to eliminate routine flaring from mining operations by 2025.
But overall, with reduced capex and structural operating cost cuts of at least $2 billion by the end of 2025, Shell appears to be looking to spend less, deliver more value and lower emissions while keeping investors on board. That’s a tall order and it remains to be seen how it all pans out.