Quester View Part 1....Hold11 May 2023 11:42
The bumper first-quarter profits published by Shell last week will upset environmental campaigners and many householders alike, especially those who are finding it hard to pay their bills or keep their car topped up.
Even global tax payments of $5.6bn (£4.5bn) in the first three months of the year – $2.1bn more than in the equivalent period in 2022 – may not assuage their fury.
But those investors who desire reliable income and are prepared to focus purely on dollars and cents, nickels and dimes rather than debate environmental, social or governance (ESG) issues, will be pleased to see the oil and gas giant pumping out cash.
Shell handed over $6.3bn via buybacks and dividends in the first quarter alone and annualising that equates to £20bn, or a cash yield in the double-digit percentage range.
That is probably the key number right now because Shell’s earnings do take some studying.
On the face of it, the business model of an oil major is easy enough to understand.
They explore and drill for and then produce hydrocarbons; they ship and refine them; they trade them; and they sell refined product at petrol stations or end-products like chemicals. Simple.
Quantifying how well they do this is a different matter and besides statutory measures such as pre-tax or net (after-tax) income, Shell also refers to earnings before interest, tax, depreciation and amortisation (Ebitda), adjusted Ebitda, adjusted earnings and earnings on a CCS (current cost of supply) basis, which excludes the effect of changes in the oil price.
To quote Ed Murrow, the American broadcaster: “Anyone who isn’t confused really doesn’t understand the situation.”
To cut through all of that, it may be simplest to look at net, or after-tax, income. In the first quarter, Shell reported net profit of $8.7bn, compared with $7.1bn a year ago.
That increase may seem odd, bearing in mind the average prices received by Shell for its oil and natural gas fell by a fifth and two fifths respectively from the first quarter of 2022 to the first quarter of this year.
But Shell booked a $3.9bn writedown on its Russian assets in the first quarter of last year, so profits were down this time compared with a year ago once that is taken into account, thanks to lower hydrocarbon prices, no great change in output and higher taxes.
That meaty net profit figure more than covers the dividend, which equates to a 3.9pc forward dividend yield, according to analysts’ consensus estimates, and the buyback.
As such, it forms the main plank of any investment case for the stock, even if any portfolio-builder who runs strict ESG screens is likely to be unmoved and stick to their own personal principles, especially if they believe oil firms to be profiteering.
The sheer scale of the net profit number inevitably raises that issue.
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