Morning Note: Market news and an update from Shell.

Market News

US equity markets moved lower into the close last night – S&P 500 (-1.2%), Nasdaq (-1.4%) – as investors digested cautions Fed comments. Neel Kashkari warned it’s possible the Fed won’t cut rates this year, while Loretta Mester suggested the Fed may be near the confidence level it needs to start easing. Thomas Barkin stressed the need for patience, saying CPI is still too high and there’s time to assess the data. The 10-year Treasury yield was steady at 4.32%, while gold slipped to $2,286 an ounce. This all comes ahead of today’s US jobs report, with nonfarm payrolls expected to come in at 213k.

This morning in Asia, markets were also weak: Nikkei 225 (-2.0%); Hang Seng (-0.1%); Shanghai Composite (holiday). The yen rose to a two-week high after Kazuo Ueda signalled the possibility of a Bank of Japan rate hike in the second half. He told the Asahi that inflation momentum will strengthen from the summer.

The FTSE 100 is currently trading 0.9% lower at 7,901. Sterling trades at $1.2621 and €1.1652. The oil price pushed higher and currently trades at $90.50 a barrel.

German factory orders only rose by 0.2% month-on-month in February, below the 0.7% increase expected. The ECB will embark in June on a steady path of rate cuts that’ll run at least through the end of next year, according to a Bloomberg survey. The reductions will take the deposit rate from its current 4% down to 2.25% by late 2025.

Source: Bloomberg

Company News

Shell has this morning released a Q1 update note and an overview of the group’s current expectations for the period. Full details will be published with the Q1 results on 25 April. In response, the shares have been marked up by 1% in early trading, due mainly to the ongoing strength in the oil price.

Shell is a global integrated energy company with expertise in the exploration, production, refining, and marketing of oil and natural gas, and the manufacturing and marketing of chemicals. The group is also allocating capital to low and zero carbon products and services including wind, solar, advanced biofuels, EV charging, hydrogen, and carbon capture & storage. According to Brand Finance Global 500, Shell is the most valuable brand in the industry, valued at around $50bn.

The business is divided into five segments:

·       Upstream (i.e. E&P) explores for and extracts crude oil, natural gas and natural gas liquids. Shell has best-in-class deepwater assets complemented by resilient conventional assets in the Gulf of Mexico, Brazil, Nigeria, UK, Kazakhstan, Oman, Brunei, and Malaysia.

·       Integrated Gas includes liquefied natural gas (LNG), conversion of natural gas into gas-to-liquids (GTL) fuels, and other products. Shell is the global leader in LNG, a critical fuel for the energy transition, with a business that spans upstream, liquefaction, shipping, marketing, optimising, and trading.

·       Chemicals & Products is made up of a focused set of assets – there are currently five energy and chemicals parks (i.e. integrated refining and chemicals sites) and seven chemicals-only sites.

·       Marketing includes mobility, lubricants, and decarbonisation. In addition to the service stations with their EV charging footprint, Shell is the global number one lubricants supplier and operator of assets is renewable natural gas, sugar cane ethanol, and biofuels.

·       Renewables & Energy Solutions includes Shell’s production and marketing of hydrogen, integrated power activities (solar and wind), carbon capture & storage, and nature-based projects. The assets are helping to reduce the carbon intensity of the group’s hydrocarbon product sites.

The group’s strategy (Powering Progress) is to invest in providing secure supplies of energy, while actively working to reduce carbon emissions at a time of macroeconomic and geopolitical uncertainty.

The focus is on value over volume – the group will take advantage of opportunities where it has competitive strengths, existing adjacencies, a track record, strong customer demand, and clear regulatory support from governments.

In the period to the end of 2025 (known as the First Sprint), the company is seeking to:

·       Improve performance and increase efficiency, with annual operating costs reducing by $2bn-$3bn by the end 2025.

·       Increase investment discipline – capital investment (organic spend and M&A) will reduce to $22bn-$25bn p.a. over 2024 and 2025, with around a quarter for low carbon solutions.

·       Simplify the portfolio through the sale of high-cost and lower-return businesses.

·       Generate free cash flow per share growth of 10% p.a. through to 2025 and free cash flow growth on an absolute basis more than 6% p.a. between now and 2030.

Today’s statement highlights that in the three months to 31 March 2024:

·       In the Integrated gas division, trading and optimisation results are expected to be strong, but significantly lower than an exceptional final quarter of 2023. Integrated gas production is forecast to be 960-1000kboe per day.

·       Upstream production was 1820-1920kboe per day. Exploration well-write offs are expected to be around $0.6bn, mainly in Albania.

·       Marketing results are expected to be in line with the previous quarter.

·       Chemicals sub segment losses are expected to be lower than in the previous quarter. Trading and optimisation in the division is expected to be significantly higher than in the previous quarter.

·       Renewables and Energy Solutions is expected to generate between a loss of $100m and a profit of $500m.

The group has a strong balance sheet and targets AA credit metrics through the cycle. Further details on the group’s gearing will be provided with the results on 25 April.

Shell’s current policy is to return 30%-40% of cash flow from operations (CFFO) to shareholders through the cycle through a combination of dividends and share buybacks. The group’s dividend breakeven is around $40 per barrel and the group is targetting 4% growth annually. At $50 a barrel, share buybacks will be undertaken, which will be prioritised over debt reduction as management believe the shares are undervalued. The latest $3.5bn programme has recently been completed and a new programme is likely to be announced with the Q1 results. In total, this will amount to an annual total cash return of more than 10% of the market cap.

We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain a crucial part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without using hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, and natural decline rates, are increasingly leading to constrained supply.

In common with all the oil majors, Shell is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic and geopolitical uncertainty. Despite strong performance over the last three years, the shares remain on an undemanding valuation (PE 8x), both in absolute terms and relative to the US majors, which fails to discount the potential for strong free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation.

Source: Bloomberg