The Shell (LSE:SHEL) share price is faltering in early trading on Thursday (30 October) despite the FTSE 100 company reporting a 27% profit increase in Q3 compared to Q2. So is this a buying opportunity?
Results in the oil division were uninspiring, but volatile gas prices led to a strong trading and optimisation performance. And this highlights one of Shell’s key strengths.
Results
The real highlight of Shell’s report was its natural gas business, where adjusted earnings were 24% higher than Q2. The success was driven by its trading and optimisation activities.
This essentially involves matching the company’s output to where it can generate the highest returns. And volatile natural gas prices in Q3 meant significant opportunities for the firm.
While price fluctuations can’t be guaranteed, Shell’s huge integrated network gives it a lot of flexibility to take advantage of opportunities. And this is a durable long-term strength.
Elsewhere across the company, growth was more modest. But all of the FTSE 100 company’s key divisions reported higher profits than in Q2.
Outlook
Shell achieved an average price of $64/bbl in its upstream oil business during Q3, but Brent has already dropped below that level in October. And there could be more uncertainty ahead.
The next OPEC+ meeting is imminent (2 November) and expected to result in production increases for December. That might also weigh on prices.
In terms of natural gas, the outlook for prices is also relatively uninspiring. Storage levels are around 5% higher than usual and Q4 weather is expected to be in the normal range.
Unlike oil, however, natural gas prices did jump in October. So there might be more to come in terms of strong results in this part of the business both from operations and from trading.
Shareholder returns
In terms of shareholder returns, a dividend yield of just under 4% is – literally – only half the story. Shell also announced a $3.5bn (£2.6bn) share buyback to be completed this quarter.
At today’s prices, that should bring the share count down by around 1.2%. And it’s the 16th consecutive quarter the company has spent more than $3bn on share buybacks.
This is important. Repurchasing shares means each remaining shareholder has a claim on a higher percentage of the overall company – and the dividends it distributes.
Investors shouldn’t underestimate the long-term effect of getting approximately 4% a year in share buybacks. But the big question is how much longer this can continue.
Will I buy?
It’s hard for investors to see a dividend yield below 4% as a huge opportunity when it’s been higher in recent years. But that ignores Shell’s recent focus on share buybacks, which is a huge part of the investment equation.
Add that on and the return looks more like 8% a year, which I think is pretty attractive. I’ve got my eye on a different name in the oil and gas industry at the moment, but I do think the stock is attractively priced.
The firm’s focus on shareholder returns has created some serious value for investors over the last few years. And while price volatility is a potential risk, its trading strength makes it a company to take very seriously.
