Morning Note: Market news and an update on Shell.
Market News
President Trump warned of upcoming automobile tariffs and threatened a 25% levy on buyers of Venezuelan oil, while also suggesting that some nations may be exempt from reciprocal duties set to take effect next week.
US equities moved higher in response last night – S&P 500 (+1.8%); Nasdaq (+2.3%). However, in Asia this morning Chinese shares led losses, with regional markets struggling to build on the risk-on momentum – Nikkei 225 (+0.5%); Hang Seng (-2.1%); Shanghai Composite (flat).
Treasury 10-year yields trade at 4.35% as the Federal Reserve’s Raphael Bostic said he now expects just one rate cut this year instead of two – it’s unclear whether tariffs will be a one-time hit to prices. Gold slipped to $3,010 an ounce. Brent Crude continued its recent recovery and currently trades at $73 a barrel.
Bank of England Governor Andrew Bailey said Britain needs a technological breakthrough such as AI for sustained and substantial economic expansion. The FT reports that the OBR forecast is to roughly halve the UK’s expected growth in 2025 from 2% to about 1%. The FTSE 100 is currently 0.4% higher at 8,667, while Sterling trades at $1.2910 and €1.1960.
HSBC expects to double down on Investment Banking operations in Asia and the Middle East after exiting key businesses in Europe and the US, CEO Georges Elhedery said. Separately, the bank is said to be open to outsourcing some trading business.
Source: Bloomberg
Company News
Shell is today hosting its Capital Markets Day 2025 at which it will outline the next steps in the execution of its strategy. In a brief statement ahead of the presentation, the company has highlighted it will continue to deliver more value with less emissions, growing in areas where it has competitive strengths, and increasing the amount of cash flow it distributes to shareholders. In response, the shares have been marked up by 2% in early trading.
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 (achieved through the 2016 acquisition of BG), 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 is however stepping back from new offshore wind investments and is splitting its power division following an extensive review of the business.
The group’s current 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 is taking advantage of opportunities where it has competitive strengths, existing adjacencies, a track record, strong customer demand, and clear regulatory support from governments. Where the company is not ‘advantaged’, it won’t invest.
The company has made significant progress against all of the targets it set out at its Capital Markets Day in 2023, transforming Shell to become simpler, more resilient and more competitive.
Today Shell announces that it will:
Enhance shareholder distributions from 30-40% to 40-50% of cash flow from operations (CFFO) through the cycle, continuing to prioritise share buybacks, while maintaining a 4% p.a. progressive dividend policy.
Increase the structural cost reduction target from $2-3bn by the end of 2025 to a cumulative $5-7bn by the end of 2028, compared to 2022.
Invest for growth while maintaining capital discipline, with spend lowered to $20-22bn p.a. for 2025-2028.
Grow free cash flow per share by more than 10% per year through to 2030.
Maintain the climate targets and ambition set out in Shell’s Energy Transition Strategy 2024.
To deliver more value with less emissions Shell will:
Reinforce its leadership position in LNG by growing sales by 4-5% per year through to 2030.
Grow top line production across the combined Upstream and Integrated Gas business by 1% per year to 2030, sustaining 1.4m barrels per day of liquids production to 2030 with increasingly lower carbon intensity.
Drive cash flow resilience and higher returns in the Downstream and Renewables & Energy Solutions businesses. This will be achieved through focused growth in the high-return Mobility and Lubricants businesses, directing up to 10% of capital employed by 2030 across lower carbon platforms, and through unlocking more value from the portfolio of Chemicals assets by exploring strategic and partnership opportunities in the US, and both high-grading and selective closures in Europe.
We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain 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. The company does this from a position of immense financial strength. The shares remain on an undemanding valuation (PE 8x), both in absolute terms and relative to its US peers, which fails to discount the potential for free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation.
Source: Bloomberg