Shell Plc will raise its dividend by 15 percent and increase natural gas output as new CEO Wael Sawan refocuses on fossil fuels that generated record profits last year.
It is part of a pivot by Europe’s biggest oil company to expand the most profitable parts of its business, even if they are carbon intensive, while shrinking businesses that do not generate high enough returns. The company reiterated its pledge to achieve net zero emissions by 2050, but did not present a clear plan to achieve that goal.
“We will invest in the models that work, those with the highest returns that support our strengths,” Sawan said in a statement. The CEO and his management team will present more details of the plan to shareholders at a presentation in New York later Wednesday.
Shell has been gradually recovering its dividend since former CEO Ben van Beurden cut it during the depths of the pandemic. While the latest increase will still leave the payout roughly 30% below pre-Covid levels, the move may help convince investors that the company can be a reliable source of cash, like its northern peers -most valued Americans.
Shell will now look to grow its integrated gas business and stabilize oil output until 2030, after cutting output by around 20% from a peak in 2019. This follows in the footsteps of BP Plc, which pulled its plans to reduce oil production before this 2019. course. Investors rewarded this move with a 15% jump in BP’s share price.
Shell shares rose as much as 0.5 percent to 2,307.5 pence at 10:20 a.m. in London.
“One area of initial disappointment may be in the dividend,” RBC analyst Biraj Borkhataria said in a note. “From our conversations leading up to the event, we believe the market consensus was for an increase of around 20%.”
In addition to the dividend increase, which will take effect this quarter, Shell pledged to buy back at least $5 billion in shares in the second half. The company will cut capital spending to $22 billion to $25 billion annually in 2024 and 2025, from an expectation of $23 billion to $27 billion this year.
Overall, the change in strategy of the European majors is another sign that the American vision of Big Oil is winning. As Shell and BP pivoted toward low carbon emissions in recent years, Exxon Mobil Corp. and Chevron Corp unapologetically stuck to their fossil fuel cores. That helped contribute to a valuation gap as oil investors flocked to the clear Americans, while Europeans were still too involved in oil to appeal to low-carbon purists.
Key to higher returns will be the oil and gas business that drives most of Shell’s profits. The company will no longer seek to cut oil output by 1% to 2% a year, after achieving its initial production cut plan, announced in 2021 amid a focus on reducing carbon emissions, faster than expected.
Net Zero
Despite the focus on oil and gas, Shell maintained its climate goals, including the goal of reaching net zero carbon by 2050. This includes emissions from all the fuel the company sells, known as Scope 3, and which constitute the vast majority of the company’s carbon footprint.
But as Shell ramps up natural gas and maintains oil production, it shows the company sees no end to demand for climate-changing fuels. So the company’s 2050 target is more a reflection that demand could eventually disappear, rather than a prescription to drive the change to make it happen.
“As society moves towards net zero emissions, we expect Shell’s operational plans to reflect this movement,” the company said in a footnote to Wednesday’s announcement. “If society is not net zero by 2050, as of today, there would be a significant risk that Shell would not achieve that goal.”
While many of the details of Shell’s plan will come later Wednesday, the initial outline puts oil and gas front and center, while giving low-carbon efforts a smaller supporting role. That’s a big difference from the company’s strategy update about two years ago, when Shell said its oil production would decline and named electricity and low-carbon hydrogen as its key sources. of growth
Today, Shell said it would invest “selectively” in power, focusing on markets where it can add value with its traders. Investments in hydrogen and carbon capture technology will be made “in a disciplined way to create options for the future.”
Overall, the company said it plans to invest $10 billion to $15 billion from 2023 to 2025 for low-carbon energy sources such as biofuels, hydrogen, electric vehicle charging and carbon capture and storage. That spending will have to adhere to Shell’s mission to increase shareholder returns, the company said.
“We need to continue to create profitable business models that can scale at pace to truly impact the decarbonization of the global energy system,” Sawan said.
