The oil price recently hit a three-year high, and this has delivered the group an unexpected windfall.
According to today’s release, the higher oil price and improved macroeconomic outlook mean the company will accelerate its shareholder return plan. It’s looking to return 20% to 30% of free cash flow from operations to investors with share buybacks or dividends.
Management also declared that the company would “retire” its previous target of higher returns once net debt fell below $65bn.
The firm says it will provide further updates on shareholder returns alongside its second-quarter results.
Shell share price bounce
This is excellent news for investors. Only this time last year, the company was warning of lower returns in the future and was forced to slash its dividend, a move that sent shockwaves through the City.
Now it looks as if Shell is back in business. Rising demand for oil and gas, as well as chemical products, means the company’s profits are rising, providing the group with capital to strengthen its balance sheet and reinvest in future growth.
What’s more, it appears as if the death of oil and gas has been vastly overstated. Oil demand took a hit last year, but reduced output more than offset lower demand. As such, oil prices have rebounded. There’s even some speculation the price of the black gold could return to $100 a barrel. If it does, Shell could be in the money.
All of the above factors suggest the outlook for the Shell share price is improving. However, I’m in no rush to buy the stock, despite its progress.
There are a couple of reasons why. First of all, all there’s no guarantee the oil price will continue to rise, and Shell’s profits will continue to grow.
Oil prices are highly volatile and they can fall just as fast as they rise. Indeed, in the first half of last year, at one point, the price of oil fell below zero.
At the same time, I think Shell lags behind its peers when it comes to the energy transition. The company has outlined plans to increase spending on renewable energy projects, but oil and gas output will generate most of its revenues and profits for years to come.
I think this could leave the group overexposed to a sector that’s seeing increasing costs and poor fundamentals.
As such, while today’s update has helped send the Shell share price higher, I wouldn’t buy the stock today. I think the company faces significant risks and challenges in the years ahead, and there’s no telling how it will navigate the environment. The business may also start to struggle again if the price of oil slides.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.