As Shell [SHEL.L] prepares to report its first quarter earnings on 5 May, investors will want to know whether its decision to pull out of its Russian assets following the February invasion of Ukraine puts its recovery on hold.
The oil major had posted a trading update on 7 April warning that it will take a $4bn to $5bn hit from exiting its Russian operations, sending the Shell share price down 2.1%. However, it said that the post-tax impairment cost, up from earlier forecasts of around $3.4bn, would not impact its earnings.
The company is pulling out of its 27.5% stake in Russian gas giant Gazprom’s Sakhalin 11 LNG facility, a 50% stake in the Salym Petroleum Development and its 10% stake in the Nord Stream 2 gas pipeline project, worth around $1bn.
However, the war in Ukraine has also led to a sharp spike in already high oil prices. According to Yahoo Finance, benchmark crude prices hit an average of over $100 a barrel in the first quarter – its highest in almost a decade. Rising oil and gas prices have been a tailwind for the Shell share price, which has climbed 35.2% in the year-to-date to close at 2,173p on 29 April.
What could impact the company’s earnings is a $7bn cashflow hit, which it said that it took out to cover oil and gas margin calls. As a result, analysts expect the company to report earnings per share of $2.20, according to CNN Money, and sales of $81.5bn, up from $59.1bn this time last year.
Shell set to invest $25bn in UK energy system
Shell’s profits bounced back in 2021, as the global economy recovered and oil prices soared. In February, the company reported full-year adjusted earnings of $19.29bn, up from $4.85bn in the same period last year, which beat analysts’ expectations of $17.8bn.
Most of its profits boost came from its integrated gas business, coming in at over $4bn. The refining and trading business slipped to a loss of $251m in Q4, however, largely due to higher costs and maintenance shutdowns. The group also announced an $8.5bn share buyback programme for the first half of 2022 and hiked its dividend by 4% to $0.25 per share in Q1.
If Shell were to post another strong quarter, it could reignite calls for a windfall tax in the UK on energy firms’ profits. Chancellor Rishi Sunak said that “nothing’s ever off the table” if companies like Shell don’t invest more in the UK’s energy security. But the company is already committing more cash. In March, Shell said it was investing £25bn in the UK energy system over the next decade, with most going on green projects.
It has further burnished its green transition image by completing the purchase of solar and energy storage developer Savion in the US at the end of last year, as well as winning bids with Scottish Power to develop 5GW of floating wind power in the UK in January this year.
Discussions with Chinese firms to sell Russian gas stake
When Shell announces its results, investors will be keen to hear more about its Russian disposals and any interest being shown by buyers. Shell is reportedly in talks with Chinese firms including Sinopec [0.386.HK] and CNOOC [0.883.HK] about buying its stake in Sakhalin 11.
Analysts seem bullish ahead of the earnings announcement. According to MarketBeat, Shell has a consensus ‘buy’ recommendation from analysts. The consensus price target for the stock is 2,6330, representing a potential 21% upside on its 29 April closing price.
JPMorgan is even more bullish with a 2,850p target price. Analyst Christyan Malek says its integrated gas business reveals a "superior risk/reward" on over 20% spot-free cashflows. “Heightened government policy focus on energy security is accretive for both the unit's strategic value and free cashflow outlook, placing a premium on Shell's ability to deliver long-term gas supply certainty,” he added as reported by the Fly.
Jefferies has a 2,600p target price, stating that Shell will see a significant trading contribution from integrated gas and oil products in Q1. It says Shell is a “key winner in the current macro environment”.
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