Shell: Well On Track To Deliver On CMD Sprint (NYSE:SHEL)

Shell (NYSE:SHEL) delivered a good H1 performance with expanding production, mainly in gas, and a strong improvement in chemicals on stabilizing margins. A key support for earnings during lower price decks was the further progress towards the $2-3B structural cost savings plan unveiled during the 2023 CMD as part of the first “sprint” to 2025. At ~$1.7B achieved as of H1 and several high-scale divestments in lower-return areas, CEO Sawan and his team continue to deliver on Shell’s transformation into a more efficient and streamlined entity. Buybacks are held at $3.5B/quarter through at least Q3, providing a 10%+ annual distribution yield, including an 11% dividend raise YTD.

We continue to like the story and reiterate our Overweight rating with a price target of $90 per US ADR, implying ~26% upside to current trading levels. Key risks include unfavorable oil price impacts due to a weakening global economy or expanding supplies at OPEC as well as company-specific issues such as exploration or development failures.

[Note: Peers are ExxonMobil (XOM), Chevron (CVX), BP (BP) and Total (TTE). All information from Shell’s Q2 report and investor presentation.]

Key Discussion Points

H1 profit down 5% due to weaker prices offsetting higher production. FY capex guidance likely to be undershot. Average daily production during H1 was up vs the previous year at ~2.9Mboe, an increase of ~2%, mostly driven by gas-heavy startup of projects in Oman, Australia and Malaysia. Liquids volumes were slighty down as field declines offset any incremental positive impact from new GoM projects. Liquids mix thus fell 1pp to 52%. LNG production was broadly stable at ~14.53Mt for the 6m-period given no major startups with just a slight positive impact from lower maintenance in Australia. However, in June Shell announced the acquisition of Singapore-headquartered Pavilion Energy which operates a global LNG trading business. At a contracted supply volume comprising of about 6.5Mt/year, the deal can be expected to provide a considerable boost to volumes and support delivery of 20-30% LNG growth through 2030.

Group (adj.) earnings for H1 24 came in at 14.0B, down ~5% vs H1 23 but ahead of consensus with earnings per share (US ADR) up 2% to $4.38 on a lower share count. Lower earnings were mostly driven by weaker performances in Upstream and IG due to a lower price deck while marketing was broadly stable. CP earnings improved considerably on stabilizing refining and chemical margins and were up 27% HoH to $2.7B.

Considering unadjusted results, the period saw 2 large impairments with $708MM related to the divestment of its Singapore chemical complex and a $783MM charge following the decision to halt construction of one of Europe’s largest biofuel facilities in the Netherlands. While a temporary drag on (unadjusted) financials, both divestments should boost group returns in the future and are evident of management’s focus towards higher project and delivery efficiency.

A key point during the period were significantly lower cash capital expenses than previously guided for at just $9.2B, ~21% below the previous year’s H1. Despite this, management reiterated its full year guidance of $22-25B in cash capex. We estimate that this would imply a sequential HoH step-up of 39%-71%, depending on where in the guided range full year lands. During the call management further reiterated the guidance, citing seasonally higher cash outflows in H2 and a similar trend observed during FY23. However with H1 24 capex 21% below H1 23 and FY23 capex at ~$24.5B , this would imply a significantly higher H2 rampup than during the previous year.

Majority of targeted $2-3B in structural cost savings through 2025 achieved. On an LTM basis as of Q2, Shell has achieved ~$1.7B in structurally lower expenses as opposed to 2022. This has been slightly offset by a negative ~$0.2B contribution from growth and macro factors for LTM underlying expenses of $38B. Management notes that during H1 alone it realized ~$0.7B, driven by both non-portfolio (improved operational efficiencies and leaner overhead) and portfolio factors (i.e. divestment of retail power biz in UK and Germany). Compared to the initial cost stock of $39.5B, this implies a ~4% reduction within 6 quarters and a 70% progress assuming the midpoint of the $2-3B target range, both of which should add credibility to management’s streamlining of the business.

I note that current cost calculations do not account for planned/announced divestments, including those of a Singapore chemical complex, Nigeria onshore and the Pakistan retail network. With those expected to close in either H2 or FY25, I see substantial runway for further cost reductions while an ongoing transition to leaner overheads and a more focused approach to project development should grant support on the non-portfolio side.

New GoM and LNG projects have added ~50% of targeted 500kboed new, high-return production. With major project startups in Oman, the Gulf of Mexico, Brazil and Malaysia, Shell has brought up ~250kboed of additional equity production since mid-23. With Whale (GoM), Mero stages 3 and 4 in Brazil and the Penguins redevelopment in the UK North Sea projected to achieve first oil through H2 and FY25, Shell is well on track to deliver around 500kboed of new production by YE25.

With virtually all new projects in low-risk, high-margin core areas without any necessary frontier exploration, this alongside targeted divestments should drive further improvement to barrel margins. I note that the majority of upcoming completions are liquids-rich developments with only ~10% of scheduled startups in gas-focused plays, likely providing a near-term boost to liquids mix and improve pricing in the current price environment.

Namibia remains a long-term optionality with any first oil likely not happening before around end the decade given the early state of the area’s development. However, with ~4.9bboe of gross reserve currently estimated in Shell-operated Graff and Jonker discoveries (see also here) and the company’s reported interest in Galp’s for-sale 40% Mopane field stake (~$8B estimated value), Namibia could become a key asset for Shell to extend current production levels into the next decade (see also here). With the Namibia finds estimated to be majority liquids, this should also support a balanced production mix in what would otherwise become increasingly gas-heavy post 2025 based on currently planned startups.