Morning Note: Market news and updates from Shell and Glencore.

Market News

The Fed left interest rates unchanged, indicating stalled inflation progress with an upward assessment of the labour market. Chair Powell said the Fed isn’t in a hurry to cut and its policy statement was adjusted to remove a reference to making progress toward the committee’s 2% objective. Rate cut expectations for 2025 reduced to 43bps from 48bps prior to the announcement. 10-year Treasury yields were little changed at 4.52%, while gold moved up to $2,772 an ounce. Traders now look ahead to a rate decision by the European Central Bank, with a 25 basis points cut widely expected.

US equities fell last night – S&P 500 (-0.5%); Nasdaq (-0.5%) – with results after hours from Tesla (+4%), Microsoft (-5%), and Meta Platforms (+2%). Whirlpool fell by 13%, with its results indicating that Americans are continuing to shy away from big-ticket purchases such as refrigerators. Apple, Caterpillar, Baker Hughes, and Visa report today.

In Asia many of the biggest stock markets closed for the Lunar New Year holiday. In Japan, the Nikkei 225 rose by 0.3%. The yen steadied as BOJ Deputy Governor Ryozo Himino spoke. The tone of his messages is positive for the yen.

The FTSE 100 is currently little changed at 8,554. Bank of England Governor Andrew Bailey said “very big decisions” will be needed to keep Britain’s public debt from spiraling higher. Average UK water bills are set to rise 26% from April, the biggest-ever increase for households and businesses. The increase poses a challenge to the government’s promise to bring down the cost of living and may contribute to inflation accelerating above 3% this year. 10-year gilts yield 4.63%, while Sterling trades at $1.2435 and €1.1942.

Source: Bloomberg

Company News

Shell has today released fourth quarter results which were slightly below market expectations. The group has raised its dividend by 4% and announced another $3.5bn buyback. In response, the shares are little changed 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. Last month, the group said it was stepping back from new offshore wind investments and is splitting its power division following an extensive review of the business.

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. Where the company is not ‘advantaged’, it won’t invest.

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

• Improve performance and increase efficiency. By focusing the portfolio and simplifying the organisation, $3.1bn of pre-tax structural cost reductions were delivered by the end of 2024 compared with 2022 levels. This is ahead of the group’s target.

• 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. Every investment is benchmarked against the value of share buybacks.

• 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.

In the three months to 31 December 2024, adjusted earnings fell by 50% to $3.66bn, below the market forecast. For the full year, earnings fell by 16% to $23.7bn. Compared to the previous quarter, earnings fell by 39%, reflecting higher exploration well write-offs, lower margins from crude and oil products trading and optimisation, lower Marketing margins and volumes, lower LNG trading and optimisation margins, lower realised oil prices, and unfavourable tax movements.

Underlying operating expenses rose by 3% in the quarter, although they fell by 9% across the year. By focusing the portfolio and simplifying the organisation, $3.1 billion of pre-tax structural cost reductions3 were delivered through 2024 compared with 2022 levels, with $2.1 billion in the full year 2024. Post tax impairments of $2.2bn were recognised in the quarter, including $1.0bn in its renewables division.

The group spent $21.1bn on capital expenditure in the year, 14% less than last year and below its guidance of $23bn-$26bn. The spend in 2025 is expected to be lower than our 2024 range, with more guidance to come at the Capital Markets Day in March.

During the final quarter, the group generated $8.7bn of free cash flow (and $39.5bn in the year) to leave net debt at $38.8bn, with gearing at a comfortable 17.7%. This included the addition of $5.4bn of new lease liabilities recognised in Q4, including the recognition of the LNG Canada pipeline liability.

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 (vs. $77 currently) and the group is targetting 4% growth annually. With today’s results, a Q4 dividend of 35.8c a share was declared, 4% above the same quarter last year. The total payout for 2024 was $1.39, up 7%, equal to a yield of 4.3%.

At $50 a barrel, share buybacks will be undertaken as a priority to debt reduction and capital investment as management believe the shares are undervalued. With the latest $3.5bn programme completed, a new $3.5bn programme has been announced today to be completed by the end of April. Total shareholder returns are expected to amount to more than 11% of the current market cap.

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

Glencore has released its 2024 Production Report ahead of its full-year results on 19 February. In response, the shares are down 1% in early trading.

Glencore is a vertically integrated commodities business, with a strong position in the production of copper, coal, nickel, zinc, cobalt, and precious metals, and a unique marketing business which markets and distributes commodities sourced from internal production and third-party producers to industrial consumers. The group’s strategy is to own large-scale, long-life, low-cost Tier 1 assets.

Glencore is a leading producer of metals that are used in low-carbon and carbon-neutral technologies, such as electric vehicles and renewable energy, the outlook for which is underpinned by robust demand and persistent long-term supply challenges. The IEA estimates that by 2050 the metals requirement for clean energy technologies will amount to 2.1x-3.4x more copper than in 2020, 10.8x-30.1x more nickel, and 9.9x-32.9x more cobalt. Given the industry’s supply constraints, the group is also increasing its investment in recycling and circularity.

Glencore’s acquisition of a 77% interest in Teck’s steelmaking coal business (EVR) for $6.9bn in cash completed last July. The remaining stake is owned by Nippon Steel (20%) and POSCO (3%). The assets will complement Glencore’s existing thermal and steelmaking coal production located in Australia, Colombia, and South Africa. Glencore believes global population growth, increased urbanisation, and a growing middle class should continue to drive long-term demand for steel and the steelmaking coal required to produce it.

Following consultation with its shareholders, Glencore has decided to retain its coal and carbon steel materials business rather than demerge it. The company believes the cash generative capacity of the business significantly enhances the quality of the overall portfolio, by commodity and geography, and broadens the company’s ability to fund its strong portfolio of copper growth options as well as accelerate shareholder returns. Management sees potential upside through synergies as the EVR assets are integrated into the portfolio. The company will continue to oversee the responsible decline of its thermal coal operations in line with its current targets.

Now to today’s update. The company has reported a net overall addition to its 2024 mineral reserve base, notably in copper at Antamina, bauxite at MRN, and steelmaking coal via the acquisition of EVR, following the significant growth in the Argentina copper resources base reported in 2023.

Full-year production volumes were delivered within the group’s guidance ranges, reflecting stronger second half performances across key commodities.

- Copper – on a like-for-like basis, removing 15,000 tonnes of Cobar (sold in June 2023) volumes from the prior period, own sourced copper production of 951,600 tonnes was 4% below 2023. This reflected lower planned production at Antapaccay and Collahuasi, further impacted by geotechnical-related delays at Antapaccay and lower grades and unplanned mill downtime at KCC.

- Zinc - production fell by 1% to 905kt, with H2 17% higher than H1.

- Steelmaking Coal - production rose from 7.5mt to 19.9mt mainly reflecting the acquisition of the EVR assets during the year. Australian steelmaking coal production was consistent year over year.

- Energy Coal - production fell 6% to 99.6mt, partly reflecting the progressive impact of scheduled mine closures.

Average prices for many key commodities were lower than last year: copper (-5%), Zinc (-1%), Steelmaking coal (-25%), and energy coal (-26%).

Estimated units costs were higher in Copper (+4%), but lower in Zinc (-39%), Steelmaking coal (-18%), and energy coal (-3%).

There was no update on the profitability of the group marketing division. Updated guidance covering production and capex for the 2025-28 period, as well as 2025 unit cost guidance, will be provided alongside the release of the full-year results on 19 February.

In recent weeks, it was revealed that Glencore reportedly approached Rio Tinto late last year about combining the two big copper producers, but the discussions are no longer active.

Source: Bloomberg