Shell to Boost Shareholder Returns After Oil Price Jump. Why Investors Shouldn’t Get Too Excited.

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Royal Dutch Shell

climbed early on Wednesday as the oil major said it will boost shareholder payouts after higher oil prices enabled it to reduce debt in the second quarter.

The Anglo-Dutch company said it will increase shareholder distributions to 20-30% of cash flow from operations (CFFO), beginning at its second quarter results announcement on July 29. That could come in the form of increased dividends or share buybacks.

The company said “strong operational and financial delivery, combined with an improved macroeconomic outlook” allowed it to increase shareholder returns. A strong performance in the second quarter also helped it reduce net debt,

Shell

said in a trading update.

The surprise announcement, coming earlier than many had expected, was welcomed by investors as the stock rose more than 2% in early London trading, before slipping back to trade 0.3% up. Investors will have to wait until the end of the month for the details but Shell’s update has certainly drummed up anticipation.

Oil prices climbed to multi-year highs earlier this week after OPEC canceled a meeting to decide production quotas without an agreement. After falling back on Tuesday, prices were on the up again on Wednesday. U.S. crude West Texas Intermediate futures rose 0.8% to $73.92, while Brent crude futures gained 0.7% to $75.03.

Shell cut its dividend for the first time since World War II in April 2020 as oil demand collapsed during the height of the Covid-19 pandemic, leading to heavy losses for the world’s largest oil-and-gas companies. The oil giant slashed its dividend from $0.47 per share to $0.16 and has since hiked payouts twice to $17.35 in the first quarter of 2021.

In October, Shell set out plans to cut debt to $65 billion, and said that once that target was achieved it would distribute 20-30% of CFFO to shareholders. On Wednesday the company said it would now “retire” that debt milestone of $65 billion and continue to target strengthening its balance sheet. Though, the company did not say whether it had reached the debt target.

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Shell, along with its peers, has ramped up its shift toward a lower carbon future, announcing plans to invest up to $6 billion per year in green energy projects. In February, it outlined plans to reduce the carbon intensity by 20% by 2030.

However in May, a Dutch court ordered Shell to cut carbon emissions by 45% by 2030 in a landmark case bought by climate activist groups. Shell said it expects to appeal the decision, which found the company has a duty of care to reduce emissions.

Looking ahead. Shell’s increased shareholder distributions could be equivalent to a $1 billion to $2 billion incremental payout per quarter, Jefferies analysts estimated. However, they cautioned that the company’s decision to “retire” its net debt target suggested the milestone would not be reached.


AJ Bell

investment director Russ Mould said Shell’s “teaser” would certainly be getting investors excited ahead of its second quarter results, but also offered caution. “The continuing volatility in oil prices means managing an oil and gas business like Shell remains a high-wire act.”

He added that the Dutch court ruling to reduce emissions more quickly than planned may have an impact on any potential dividend hike. “This is likely to require significant investment and for this reason Shell is likely to be wary of overstretching itself in terms of dividend commitments.”