Shell’s share price soars as big oil strikes back

Shell posted record-breaking annual profits for 2022 last week. Fuelling the stellar numbers were oil prices, driven higher by the war in the Ukraine. Shell isn’t the only one to have benefited — big oil has staged a comeback after the pandemic decimated demand. Yet, some have begun to question the industry's commitment to energy transition.

Shell’s [SHEL.L] share price burned higher last week after the oil major posted a record annual profit of $39.9bn for 2022. That easily trumps the previous record of $28.4bn in 2008 and more than doubles the $19.29bn in 2021.

Revenue was up 46% at $381bn, driven by growth across most segments, while free cash flow rose 13.9% to $46bn. Net debt stood at $44.8bn at the end of the fourth quarter, down from $48.3bn at the end of the third quarter. Fuelling profits were higher oil prices, triggered by Russia's invasion of Ukraine.

In the fourth quarter of 2022, Shell posted profits of $9.8bn, topping the $9.5bn earned in the previous quarter. Shell declared a dividend of $0.2875, up 15% on the previous quarter, and committed to a $4bn share buyback programme.

Shell’s share price up 24% in 12 months

Shell’s shares soared 5.2% last week, closing on Friday 10 February at 2,539p. Year-to-date, the stock is up over 9% and up more than 24% over the 12-month period. Shell’s shares are now trading around July 2019 levels, having reversed a steep selloff during the pandemic. On 2 October 2020, Shell’s share price closed at 933.1p. Since that nadir it has climbed over 158%.

Shell’s profits and rising share price reflect what has been a bonanza earnings season for oil and gas majors. BP [BP.L], Chevron [CVX] and Exxon Mobil [XOM] all posted eye-watering annual profits for 2022, coming in at  $27.7bn, $36.5bn and $55.7bn respectively.

This marks a comeback for the industry. Demand cratered during the pandemic and many companies upped investment in renewable energy. However, the war in the Ukraine and concerns over energy security has seen demand for fossil fuels return.

Shell, BP and Exxon have also benefited from over $1bn in free pollution permits last year, according to a report from Open Democracy. Under climate change rules, big polluters are required to buy permits for every tonne of carbon dioxide they emit.

This year, the reopening of China’s economy could push oil demand to new highs, according to a report from the International Energy Agency.

Yet, the bumper profits have irked some with net-zero ambitions. Shell’s directors are personally being sued over the firm’s climate strategy by environmental lawyers ClientEarth, an action that is supported by some large pension funds and institutional investors. In the Netherlands, a court has also ordered Shell to limit emissions by 45% by 2030. BP last week rowed back on its commitments to cut oil and gas production 40% by 2030. Instead, BP is now aiming for a 25% reduction.

Other legal woes for Shell include a claim in the UK high court made by 11,000 Nigerians arguing that oil spills have led to the contamination of drinking water, air quality, farm land and fishing stocks.

What next for Shell’s share price?

Shell aims to achieve net zero by 2050. This will require heavy investment in new technologies, but for the time being, it's unlikely to walk away from fossil fuels, especially after a bumper 2022. Ethical considerations aside, the spectre of recession is a more immediate risk. As is the potential for greater taxation on oil companies amidst the cost of living crisis.

Of the 20 analysts offering 12 month price targets on the Financial Times, Shell has a median target of 2,970.99p. Hitting this would see a 17% upside on Friday’s close. Of the 24 offering ratings, Shell has five ‘buy’ ratings, 14 ‘outperform’ ratings and 5 ‘hold’ ratings.