Morning Note: Market news and updates from Shell and Marriott International.

Market News

The US Federal Reserve unanimously decided to hold intertest rates steady last night. Chair Jerome Powell said the Fed is seeking more confidence on inflation before deciding on a rate cut. Powell also noted it was unlikely that the central bank’s next move would be a rate hike. However, he also stated that central bankers are seeking increased assurance that inflation is declining, and while projections still indicate a decrease in inflation throughout the year, he acknowledged a reduced level of confidence compared to before.

After the comments, Fed futures priced in a 31% chance for a cut by the 31 July meeting and a 55% chance for a cut by September. The 10-year Treasury yield slipped to 4.60%, while gold reversed its recent slide and moved back up to $2,320 an ounce.

US equity markets drifted lower of the Fed announcement – S&P 500 (-0.3%), Nasdaq (-0.3%) – as did most markets in Asia this morning: Nikkei 225 (-0.1%); Hang Seng (+2.4%, playing catch-up from the holiday); Shanghai Composite (closed). The FTSE 100 is currently trading 0.2% higher at 8,138. Stocks trading ex-dividend today include Glencore (1.11%) and Relx (1.27%).

After yesterday’s 3% fall, the oil price nudged back up to $84 a barrel amid speculation that the US government may move to replenish its strategic petroleum reserves. Coal moved up 3% to a high for the year.

Lending to UK commercial real estate dropped by a third last year to the lowest in a decade as deal volumes tumbled and banks turned cautious. The £32bn of new lending was the lowest recorded since 2013, (report based on a survey of lenders by Bayes Business School). Sterling currently trades at $1.2526 and €1.1690.

Source: Bloomberg

Company News

Shell has this morning released Q1 results which were well ahead of market estimates, driven by strong oil trading and higher refining margins, and announced another $3.5bn share buyback. In response, the shares are little changed, due mainly to the near-term weakness 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.

In the first quarter of 2024, adjusted earnings fell by 19.8% to $7,73bn, but were above the market forecast of $6.25bn. Compared to the previous quarter, earnings rose 6%, reflecting lower operating expenses, higher margins from crude and oil products trading and optimisation, and higher refining margins, partly offset by lower LNG trading and optimisation margins, and unfavourable tax movements. Oil and gas production was little changed at 2.9m boe/d year-on-year, while underlying operating expenses fell by 14.3%.

The group spent $4.5bn on capital expenditure and generated $9.8bn of free cash flow. The balance sheet is strong and the company targets AA credit metrics through the cycle. At the end of the quarter, net debt stood at $40.5bn, with gearing at a comfortable 17.7%.

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. $84 currently) and the group is targetting 4% growth annually.

With today’s results, a Q1 dividend of 34.4c a share was declared, 19.7% above the same quarter last year.

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 was recently completed and a new $3.5bn programme has been announced today which will run to the end of July. In total, this will amount to a total annual cash return of around 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 9x), 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

Yesterday afternoon, Marriott International released its Q1 results. Although earnings were slightly below market expectations, the group nudged up its full-year guidance as strong international travel is expected to offset normalising US domestic demand. The shares have been a strong performer over the last year (+36%) but were little changed in response to yesterday’s update.

Marriott is the world’s largest hotel company, with nearly 8,900 properties in 140 countries and territories. The company is a fee-driven, asset-light operator with a focus on franchising and management contracts. The group’s 31 leading brands are skewed toward the mid-scale to luxury end of the market, and include: Ritz-Carlton, Marriott, St Regis, Le Meridien, Sheraton, MGM Collection, and City Express. At the end of March, the company had more than 1.64m rooms, around a 7% global market share. The group’s travel and loyalty programme, Marriott Bonvoy, now boasts 203m global members.

In the three months to 31 March, global revenue per available room (RevPAR) – the key measure of industry performance – grew by 4.2% in constant currency. Occupancy grew by 0.9 percentage points to 65.6% and average daily rate (ADR) was up 2.8% to $180.

In the US & Canada, RevPAR grew by 1.5% as demand normalised, with the group segment the stand-out performer. International markets RevPAR rose by 11.1%, driven by 17% growth in the Asia Pacific ex-China region.

The group continued to expand its estate, adding around 46,000 rooms in the quarter, including c. 37,000 rooms under its agreement with MGM Resorts International. Net room growth was 7.1%. The pipeline was 547,000 rooms, including roughly 27,000 pipeline rooms approved, but not yet subject to signed contracts. 57% of rooms in the quarter-end pipeline are in international markets. Around 37% of the pipeline was under construction at the end of the quarter.

Q1 revenue was up by 6% to $5.98bn, a touch below the market forecast of $5.93bn. The adjusted operating income margin slipped from 64% to 62%. Adjusted EPS grew by 2% to $2.13, at the bottom end of the company’s guidance range of $2.12-$2.19.

During the quarter, net debt rose from $11.6bn to $12.3bn. The group continued to buy back its shares, with $1.2bn repurchased in the quarter. Including dividends, the group returned $1.7bn to shareholders.

The company has raised its earnings guidance for 2024 to $9.31-$9.65, versus $9.18-$9.52 previously. Worldwide full-year RevPAR is still expected to increase by 3% to 5%, with net room growth of 5.5% to 6.0%. The group expects to return $4.2bn-$4.4bn to shareholders, a slight raise on the previous target of $4.1bn-$4.3bn. In the current quarter, RevPAR is expected to grow by 4%-5%, with EPS of $2.43-$2.48.

In the medium to long term, we believe the industry has attractive long-term growth potential, and with its scale and strong brands, Marriott should benefit from a ‘survival of the fittest’ bias as many smaller competitors continue to exit the market.

Source: Bloomberg