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Shell announces $6bn buyback scheme after record quarter

Shell share price: A worker refills a Shell petrol tanker.

Shell's adjusted earnings, a closely watched measure of profit, came in at $11.5bn for the three months to the end of June. That marks the second consecutive quarter of record profits for the oil major, beating the $9.1bn it posted in the first three months of the year.

Bumper profits have been driven by higher oil and gas prices as a result of Russia's invasion of Ukraine. The company also pledged to give shareholders payouts worth $6bn, boosting the Shell share price by 2.2% this morning as markets opened. 

Q1 recap – a record quarter

Shell's first-quarter results, reported in May, were its best in over a decade as high oil and gas prices prompted a boom in revenues and profits. The results helped drive the Shell share price to its highest level since July 2019.

Taking some of the gloss off the Q1 update was a $3.9bn charge in respect of its Russian assets, which put a dent in the overall numbers. On an underlying basis for Q1, adjusted earnings rose 43% from Q4 to $9.1bn, beating expectations of $8.2bn.

Today's Q2 results go one better 

The Q2 numbers, released on Thursday morning, reveal another record quarter. Earlier this month Shell announced it was revising up the value of its oil and gas assets on the back of higher refining margins, as it generated higher returns from higher prices. 

This has translated into a bumper set of Q2 numbers which will, in all probability, attract a torrent of criticism from the usual suspects about profiteering during a cost of living crisis. However, as the government has already implemented a windfall tax, that horse has left the stable.

On an underlying basis Q2 adjusted earnings more than doubled from a year ago to a new record of $11.47bn, with integrated gas contributing $3.76bn in Q2, while upstream contributed $4.9bn. Earnings for Q2 pushed half-year profits to $20.6bn, raising the question of whether Shell can maintain this level of profitability in the second half of the year. 

Shell has continued to make big strides in reducing its net debt, which pre-pandemic stood at more than $75bn. Today’s Q2 and half-year results show that net debt has been cut further, from $48.5bn in Q1 to $46.4bn in Q2, and the company has also lowered its gearing to below 20%. In the last year, debt has fallen by $20bn.

The company also launched a $6bn share buyback scheme, handing shareholders another generous payout, while the dividend was kept unchanged at $0.25 a share.

Improved cash flow gives Shell greater flexibility on its day to day spending plans. The figure increased to $18.66bn, a decent rise from the same period a year ago. It’s interesting to note that nobody is talking about splitting the company up as they were just over a year ago.

Inevitably with such strong returns, the company will find itself under further scrutiny about how it uses its profits.

Further spending to come

Looking ahead, the company maintained its guidance on capex at between $23bn and $27bn this year. Shell spent $5bn in Q1, and $7bn in Q2. However, of that $7bn, only $321m was spent on renewables, down from $985m in Q1.

Investment in clean energy will continue to be a stick to beat Shell with, though the issue needs to be set in the context. Renewables aren’t Shell's area of expertise. As such, the renewable business can only grow by acquisition. With such thin margins, Shell needs to be careful about how it spends its money. There’s also not much that Shell can do about the lack of integrated power grids, which is an area that probably needs a lot of government investment as the global economy looks to decarbonise.

The amount of profit that renewables contribute to Shell's bottom line is also tiny, standing at $725m in Q1 and at just over $1bn for the first half of the year.

In Q2 Shell announced the final investment decision to develop the Jackdaw gas field in the North Sea, as well as approving a deal in Australia to approve a natural gas field there. The company also signed a deal with QatarEnergy as part of the expansion of the North Field natural gas project.

On renewables, Shell announced a final investment decision to build Holland Hydrogen 1, which will be Europe’s largest renewable hydrogen plant. The site is expected to go operational in 2025. In addition, Shell acquired 100% of Solernergi in Mauritius, as well as the Sprng Energy group of companies in India, which is expected to complete later this year.

Shell also confirmed its plans to spend £25bn on renewables projects in the UK by the end of the decade, despite the British government's recent decision to impose a windfall tax on oil and gas companies. 

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