Shell Seeks to Close Valuation Gap With US Rivals

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New Shell CEO Wael Sawan said on Thursday he wants to boost the company's stock market valuation with a strong but disciplined performance.

With a current market capitalization of around $200 billion, Shell is valued more highly than European peers BP and TotalEnergies but lags far behind US rivals Exxon Mobil and Chevron.

The weaker share price performance of the European majors has led to speculation that they could become takeover targets for Exxon and Chevron, which boast valuations of around $460 billion and $330 billion, respectively.

"I think it's fair to say that — I believe at least — we're undervalued, and that's partly why we continue with robust buybacks," said Sawan, who took over as Shell CEO on Jan. 1.

The UK-based supermajor announced another $4 billion share repurchase program with its fourth-quarter and full-year 2022 results, which saw it post record annual profits of almost $40 billion.

However, Sawan said the biggest opportunity for Shell to raise the valuation of the company was by "performing with discipline."

"I look forward to seeing the valuations come as a result of that strong performance," he said.

Shell demonstrated financial discipline throughout 2022, with its capital spending coming in at $24.8 billion — almost bang in the middle of its $23 billion-$27 billion guidance range.

It has kept the same guidance range for this year despite inflationary pressures and the inorganic capex associated with recent acquisitions such as Danish biogas producer Nature Energy, which Shell agreed to buy for almost $2 billion.

The company also hiked its fourth-quarter dividend by 15% to $0.2875 per share.

Total shareholder distributions for 2022 were around $26 billion, slightly higher than capex.

Balanced Transition

In his first earnings call as CEO, Sawan said the world needs a balanced energy transition, and that Shell will continue to invest and divest in both oil and gas and renewables, but added that Shell and its customers are on a "clear trajectory" toward progressively lower carbon energy solutions.

"Moving too fast by dismantling the current energy system before the new system is ready, could worsen the situation, but moving too slowly could waste precious time and lose the momentum to build necessary solutions for low-carbon energy at scale," he said.

Sawan also hailed the US Inflation Reduction Act as a "good stimulus" for climate and energy policies that Shell is "excited about."

"We see now opportunities that we were on the fence on — that are suddenly interesting because of the tax credits and therefore will now attract capital dollars to invest," he said.

The IRA has created further opportunities for Shell in renewable electricity and the company also sees promise in areas like blue hydrogen and carbon capture and sequestration, including direct air capture, he added.

"Our focus is on making sure we leverage our existing assets in the US to be able to leverage some of the opportunities that have come up, and of course we will continue to look at opportunities that emerge that might add to our portfolio."

Europe's Good Luck

CFO Sinead Gorman echoed Sawan's praise for the US bill and said Shell expected to see the same sort of positive impact in Europe as the EU works to put equivalent legislation in place.

The development of renewables in Europe, as well as the rapid deployment of regasification facilities in Germany, has helped the continent to find its way through the region's gas-supply crisis, Sawan said.

"But we've also had quite a bit of luck," in the form of a mild winter and lower imports of LNG into China, which is set to change after the country recently ended its strict zero-Covid-19 policy, he explained.

"On balance what I therefore see is a tight market still going into 2023," Sawan said.

"I'm pleased to see where the gas storage levels continue to be at the moment, but I would not say we're out of the woods, and therefore caution needs to be exercised and we need to continue to focus on a multi-year energy solution."

Shell Q4'22 and Full-Year Earnings
($ million)Q4'22Q3'22%Chg.Q4'21FY'22FY'21%Chg.
Operating Cash Flow22,40412,539798,17068,41345,10452
Net Income10,4096,7435411,46142,30920,101110
Adjusted Income9,8149,45446,39139,87019,289107
Upstream Income1,3805,537-744,91416,2239,60369
Chemicals and Products Income322980-66-34,5154041018
Integrated Gas Income5,2935,736-8477122,2128,060176
Renewables and Energy Solutions Income4,673-4,0232161,894-1,059-1,51430
Liquids production (million b/d)*1.4541.396416101,4611,684-13
Gas production (Bcf/d)*7.677.640.48.587.878.69-9
Oil and gas output (million boe/d)*2.7762.7132%3.0882.823.18-11%

Earnings, Equity and Debt Markets, Corporate Strategy , Capital Spending, M&A, Low-Carbon Policy, Gas Supply, Majors
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