It may surprise many that the Shell (LSE: SHEL) share price is down 11% from its March high this year. After all, it has many oil- and gas-rich fields under exploration and development all over the world. And it makes great profits and rewards its shareholders well.
For me, the one thing that explains the drop in the share price has been mixed messaging over its future. Is it still committed to being a world-leading oil and gas firm or is it committed to energy transition?
In the past few days though, new CEO Wael Sawan appears to have ended any confusion. And for me, this is a good thing.
A clear vision to greater success
Sawan’s widely-reported comments encompass a clear vision for Shell, with a clear commitment to its core oil and gas business. More specifically, he underlined that it would keep oil production at current levels of 1.4m barrels per day until 2030. It will also expand its huge liquefied natural gas business.
This reaffirmation of Shell as primarily an oil and gas giant is in line with its major US rivals. Despite the greener US Presidential Administration of Joe Biden, they have remained unwavering in their commitment to these core businesses.
As for the greener projects that Shell had lined up, thOSE that perform well will stay. Those that do not will be offloaded, which will also reduce costs. It is as simple as that.
The priorities for the business going forward are reflected in the spending plans. Some $40bn will be spent to add 500,000 barrels of oil equivalent per day of oil and gas production by 2025. $10bn-$15bn will be spent in the same period on low-carbon projects.
A great foundation to build on
I feel these plans clarify what Shell is all about and should augment its already excellent foundations. In Q1 it made a whopping $9.6bn in earnings. These outstripped its huge same-quarter earnings in the previous year – of $9.1bn.
After its 2022 results, Shell increased the Q4 dividend per share by 15% to 28.75 cents, bringing the annual total to $1.04. It also announced a share buyback of $4bn to be completed by the Q1 results announcement.
Another $4bn of buybacks are planned for completion by the time of the Q2 results announcement. This would bring total shareholder distributions to around $12bn for the first half of this year.
A trading powerhouse as well
Shell has another ace up its sleeve when it comes to generating profits that is not widely known. Like a few other global energy firms, it has a top-flight in-house trading team with access to unparalleled energy data. This means that it can make just as much money when energy prices fall as when they rise.
According to oil industry estimates, its expert trading teams contributed around 20% of its entire earnings in 2022.
For me, the risks in the Shell share price are that lobbying by the anti-oil community may affect its operations. Another risk is that it may need to speed up its transition to cleaner energy.
I already have holdings in the energy sector, with a good dividend yield and growth potential. But if I did not, then I would buy Shell shares now without any hesitation.
