Shell sweetens shareholder returns as oil and gas prices boost earnings

Shell will increase its dividend and buy back more shares after high prices for oil and gas helped it deliver bumper full-year earnings after a strong fourth quarter.

The UK-headquartered oil group’s adjusted earnings for 2021 — the profit measure most closely tracked by analysts — rose to $19.3bn, from $4.8bn a year earlier when the pandemic hit oil demand.

Earnings for the last three months of the year were $6.4bn, beating average analyst estimates of $5.2bn and up from $393mn in the same period a year earlier and $2.9bn in the fourth quarter of 2019.

Ben van Beurden, Shell’s chief executive, said 2021 had been a “momentous year” for the business. As a result, the company was “stepping up” its distributions to shareholders, he said, with a commitment to buy back $8.5bn in shares in the first half of 2022 and raise its dividend by roughly 4 per cent to 25 cents a share in the first quarter.

The bumper profits mark a stark turnround for the group after a bruising 2020, when Shell recorded its lowest earnings since the unification of Royal Dutch and Shell Transport in 2005 and the only annual loss in the company’s history.

But van Beurden pushed back against calls from some British politicians for a one-off windfall tax on oil and gas companies to help support households struggling to pay energy bills, driven by the soaring wholesale prices that underpinned Shell’s profits.

“I am not convinced that windfall taxes — popular though they may seem — is going to help us with supply, nor is it going to help us with demand,” he said. “But, of course, we stand ready to be in dialogue with government on all the measures that we can collectively take.”

The improved figures echoed those of US rivals ExxonMobil and Chevron, which in the past week reported net profits in 2021 of $23bn and $15.6bn respectively, the highest since 2014 when crude last traded above $100 a barrel.

Shell’s performance was driven by its integrated gas, renewables and energy solutions division, which generated more than 63 per cent of group earnings in the fourth quarter, as an energy crunch in Europe pushed up natural gas prices. That helped it pay down $4.9bn of borrowing in the fourth quarter, reducing net debt to $52.6bn compared with $75.4bn a year earlier.

The world’s largest trader of liquefied natural gas said it had benefited from higher prices and trading margins after overcoming supply problems at some of its facilities that had hobbled performance in the previous quarter.

The “monster integrated gas earnings” led to “a particularly strong beat on group earnings at $6.4bn, 22 per cent ahead of consensus”, said Biraj Borkhataria at RBC Capital Markets.

Van Beurden said the company’s North Sea gas assets had operated “very well” in 2021, adding that Shell had diverted additional LNG shipments to the UK, which now received 2 to 3 per cent of the company’s global LNG cargoes. Shell was the sixth-largest gas producer in the UK’s North Sea last year, according to data from consultancy Rystad Energy.

But rather than a windfall tax, van Beurden called on the UK government to make domestic energy retailers — many of which have gone bust in the past six months — more resilient.

The UK regulator needed to ensure energy retailers had “the right risk management tools and approaches” to deal with “the extraordinary circumstances”, he said.

Shell’s performance is likely to ease some of the shareholder pressure on van Beurden after a difficult 2021 in which a Dutch court ruled it needed to cut emissions faster and US activist investor Third Point called for the company’s break-up.

The new buyback programme includes the remaining $5.5bn from the sale of Shell’s assets in the US Permian Basin that the company had already promised to return to shareholders and comes after $3.5bn in share buybacks were completed in 2021. Accelerated buybacks have been enabled in part by van Beurden’s successful simplification of Shell’s Anglo-Dutch structure in December, when it agreed to relocate its headquarters to London and create a single class of shares.

However, the group is still under pressure to demonstrate that its integrated business, which combines upstream oil and gas installations, renewable power projects and a downstream network of refineries, petrol stations and vehicle charging points, is the best way to generate value for shareholders through the energy transition.

Jessica Uhl, Shell’s chief financial officer, said the company would begin to provide more detailed information on the performance of the renewables and energy solutions business, which sits within the gas division, from the first quarter of this year. “Investors need to have more insight in terms of how that business is performing,” she said.