Hargreaves Lands View......9 Jan 2022 12:26
The changes proposed to Shell's share structure come with very few consequences for UK investors. All shareholders will end up with the same rights, making it easier to understand and value the shares.
Similarly, unifying the group's tax domicile shouldn't cause much commotion. Though it will see the group drop its 'Royal' designation.
A streamlined company will be more manoeuvrable, a net positive for shareholders, but it doesn't change the underlying story for Shell, which rests almost entirely on oil prices.
The yoyoing of the oil price over the last 18 months has made Shell's results difficult to keep track of. However, we think the underlying trend is positive thanks to the fundamental strengths of the group's assets.
With oil trading at $82.22 a barrel, close to 5-year highs, these were always going to be good times for oil majors. Shell reported record operating cash flows in the third quarter - despite production disruption caused by hurricanes in the Gulf of Mexico and an increase in operating expenses. Results may have been a touch behind market expectations, but the direction of travel is clear.
The cash windfall couldn't come at a better time for the group. Not only has it allowed it to slice tens of billions off net debt, but it's funding an increase in capital expenditure as Shell invests in new gas fields as well as low carbon alternative fuels like hydrogen. Disposals have lent a hand too, with the imminent sale of the group's Permian shale fields expected to shore up the balance sheet, while also funding a $7bn share buyback.
We suspect operating expenditure will tick up again from here, given the group's increased environmental commitments. Alongside results Shell committed to halving emissions from operations by 2030, and that either requires significant investment in new technologies, or a further restructuring of the current business - neither of which will come cheap.
Whatever happens, Shell will remain an oil and gas giant for decades. We suspect the concern is that oil & gas groups in general risk the fate suffered by tobacco companies. With investors turning their nose up at tobacco stocks at any price, valuations in the cigarette industry have sunk to what would ordinarily be considered unsustainable lows - with little to no prospect of recovery in our view. If big oil can't convince investors it's making the right moves it risks the same fate.
We're not immediately concerned Shell will end up in the ethical waste bin. But projects to keep the group moving in the right direction risk eating into cash flows - especially as many of the newer technologies the industry is exploring are untested at a global scale.
Fortunately, Shell can afford to dabble - always assuming, of course, that the oil price doesn't catch a cold. Market conditions across all the divisions are improving, there should be scope for more cost savings and production increases. That should drive profits and free cash higher.
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