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My advice: Better to start trimming the fat now when the outlook is still benign. Currently, Shell is trying to do too much, too quickly. Wael Sawan, the new chief executive officer, has promised to allocate capital “in a responsible way,” focusing on returns. He’s making already the right noises, eliminating high-paid executive positions and skipping some expensive green projects. More needs to be done.
Shell — the largest European energy company — is planning the biggest 2023 capital expenditure budget in all of Big Oil. At the midpoint of its guidance, it’s down to spend $25 billion this year, slightly higher than Exxon Mobil Corp., and well above what Chevron Corp., TotalEnergies SE and BP Plc have proposed to their shareholders.
For now, all is relatively good. On Thursday, Shell announced stronger-than-expected earnings during the first quarter, with adjusted net income at $9.6 billion, up year-on-year despite lower energy prices. The company generated $14.2 billion in cash from operations. After deducting $6.5 billion in cash spending, there was plenty for dividends as well as an elevated $4 billion for more share buybacks. Shell even was able to reduce its net debt a tiny bit.
The outlook is getting cloudier, however. Oil and gas prices have fallen sharply in recent weeks, and so have refining margins. At some point, trading income will normalize too, removing a windfall that’s cushioned Shell’s earnings for several quarters. When that happens, “it is inevitable in a weakening macro that distributions will need to re-base lower at some point,” says Alastair Syme, an oil analyst at Citigroup Inc.
Extrapolating a couple of quarters into a full year is risky, of course, but currently Shell is buying back shares at an annual rate of $16 billion. Add a price tag of $7.5 billion (and rising) in dividends, and it’s getting awfully close to $25 billion. The company has told shareholders to expect capital expenditure at $23 billion to $27 billion. The total of both will put a lot of pressure on the company’s cash generation — if oil and gas prices weaken materially.
Perhaps, if needed, Shell can take on debt again, but, unlike Exxon and Chevron, I don’t think Shell has a lot of room for leverage.
Bringing spending down would help make sure Shell can keep shareholders happy even if the energy cycle goes south. Sawan has announced a capital markets day for June 14. That’s often an occasion for companies to announce changes in strategy. Shell will likely update its capex guidance then. “We want to be disciplined in allocating capital,” Sawan told me on Thursday, pointing to some measures he has already taken in the few months he has been at the helm. “We need to build trust with our shareholders.”
Whatever metric one chooses, Shell is trailing its main rivals Exxon Mobil, Chevron and TotalEnergies. On a price-to-earnings ratio, for example, Shell is trading at just five times, compared to the 7-to-8 times of its rivals. The gap isn’t closing — despite multiple promises over multiple quarters from multiple executives — that the company would get the job done. As Sawan says, it was only three years ago when Shell was neck-to-neck with Exxon. For now, he’s still in his honeymoon period.
The new CEO must keep spending under control and stop Shell from doing too much. For a long time, the company has tried to please too many stakeholders with opposite views, devoting about a third of its capex to what it calls “transition” businesses. A lot of them, including a push into selling electricity to consumers, have not returned the money the company expected.
The time of appealing to oil investors and green investors at the same time is over. Shell should stick to its core constituency of fossil fuel shareholders, devoting spending to oil and gas. That’s the way forward, even if it makes everyone else unhappy.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
More stories like this are available on bloomberg.com/opinion
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