Changes At Oil Titan Shell As Shareholder Dividend Skyrockets, Exits Pakistan And Retail Markets

Key takeaways

• Shell has announced it’s boosting shareholder dividends by 15% next quarter and will make $5 billion in share buybacks in the second half of the year
• The move comes as Shell CEO Wael Sawan looks to reassure shareholders and Wall Street that the company deserves a higher valuation like its US rivals
• Shell’s share price was up as high as 1.6% on Thursday morning

Oil and gas giant Shell has made a string of announcements in the last week which signal the company’s future in maintaining oil and gas output, increasing its shareholder dividend and exiting the Pakistani market.

New CEO Wael Sawan is clearly keen to make a mark and renew investor confidence after a series of unprofitable renewable energy projects. But is it enough to restore faith with investors and compete against the likes of Exxon and Chevron? Let’s get into the details.

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What’s the latest at Shell?

Shell hosted its capital markets day in New York this week, where it confirmed a number of changes to shareholder dividends and buybacks as part of the oil and gas conglomerate’s bid to win back shareholders. “Performance, discipline, and simplification will be our guiding principles,” said CEO Wael Sawan at the event.

Shareholder distributions are set to rise to 30%-40% of cash flow from operations, up from the previous 20%-30% target, beginning with a 15% rise in its dividend per share from the second quarter.

Shell will also make at least $5 billion in share buybacks in H2. The changes take Shell’s dividend payout to 33 cents per share, but it’s still well below the 47 cents per share that was being paid before the pandemic.

Shell also confirmed that while its three-year $10-$15 billion investment plan for renewable energy techs such as hydrogen and electric vehicle charging remains unchanged, it will spend $40 billion on oil and gas in the same period.

Shell’s new CEO and new strategy

CEO Wael Sawan faced a big task when he first took the top job: Shell’s performance was behind its rivals, and shareholders weren’t happy. The company faced an existential crisis and an efficiency drive was sorely needed.

Shortly after Sawan became CEO, he combined Shell’s oil and gas production and liquefied natural gas (LNG) divisions in a bid to cut costs. Another move was selling its 27% stake in Australia’s Browse natural gas project to BP back in April.

Sawan also commissioned a review of Shell’s European retail business. As a result, Shell will now be exiting the home retail energy markets in Britain, Germany and the Netherlands due to weak returns on investment. “A sales process is already underway, with the intent to reach an agreement with a potential buyer in the coming months,” a statement said.

Another move just announced is that Shell has officially informed its subsidiary, Shell Pakistan, of its intention to sell its 77% stake in the business and 26% ownership of the Pak-Arab Pipeline Co.

Recent economic pressures in the country have led to several companies selling up including Puma Energy and trucking company Trella, but Shell has had a presence in Pakistan for 75 years and is one of the country’s biggest corporations.

It’s proof Sawan is serious about turning around the company’s fortunes and a big departure from the previous boss, Ben van Beurden. His strategy was focused on achieving net zero carbon emissions by 2050, and a gradual reduction in oil production between 1-2% each year has now been reversed (though Shell argues they simply met this target early).

What was the market reaction?

Shell Pakistan, which is listed on the Pakistan Stock Exchange, saw the maximum 7.5% allowable increase in its share price to close at its highest figure in months.

As for parent company Shell, Wall Street was pleased to hear of its plans to increase its dividends payout for shareholders and focus more on its core oil and gas production business. Its shares have risen to highs of +1.66% Thursday morning on the London Stock Exchange – though Shell was likely hoping for a bigger response to its announcement.

In comparison, US rivals Exxon and Chevron are down in pre-market trading on Thursday, coming in at a -1.2% and -0.9% dip, respectively. But they both still have the edge over Shell in terms of valuations. Shell had a record $40 billion profit last year and trades at five times the expected 2024 earnings, but US oil and gas companies often trade for double that.

There’s a chance the short-term focus on oil and gas production, instead of weathering the storm with the much less developed renewable energy sector, could affect Shell’s long-term future. 15% of Shell’s investor register is made up of green investors, who may not be happy to hear about Shell’s pivot back to fossil fuels and deciding it’s done with cutting its oil production target.

On Wednesday, the International Energy Agency (IEA) released a new report which said while demand for oil was still rising, it would plateau by the mid-2030s as the world transitions to cleaner energy sources. The IEA’s executive director, Fatih Birol, warned that oil companies “need to… calibrate their investment decisions to ensure an orderly [energy] transition”.

The bottom line

Energy companies are between a rock and a hard place. Those that focus on hitting net zero targets and renewable energy tech haven’t seen the rewards yet, while ESG investors still see the global conglomerates as far too oil and gas-focused to consider themselves an ESG stock.

Shell’s CEO is pulling out all of the stops and making the difficult decisions needed to help the company compete with its US rivals, despite the record profits stemming from the energy crisis. But the muted investor reaction suggests it’s still insufficient – and Shell risks angering its climate change-focused shareholders in the same stroke. Shell’s short-term outlook still looks uncertain.

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