Shell Starts $25bn Buyback on Strong Growth

Anglo-Dutch major Shell will start a $25bn share buy-back programme immediately, following strong growth and performance that this year will yield additional $10bn of free cash-flow, it said July 26. This year has already yielded $5bn of buybacks, and it has cut its debt gearing to 23.6%, with 20% now in sight.

CEO Ben van Beurden said Shell's "financial framework remains unchanged. Our free cash flow outlook and the progress we have made to strengthen our balance sheet give us the confidence to start our share buyback programme. Our intention remains to buy back at least $25bn of our shares over the period 2018-2020, subject to further progress with debt reduction and oil price conditions.”

Shell is ahead of its assets divestment programme with $27bn sold, another $3bn of sales announced and $4bn in progress. That compares with its stated aim, following the 2016 BG closure, of disposing of $30bn by year-end. Its return on average capital employed is now 6.5% and is expected to reach 10%, CFO Jessica Uhl told reporters. No further mergers and acquisitions were needed to achieve growth targets, and if it did buy more then it would come from its "industry-leading" $25bn-$30bn capital investment programme.

Its earnings in Q2 2018 were $4.7bn, more than four times the prior-year quarter, while the integrated gas division was up by $1.1bn at $2.3bn, almost double that of last year, thanks to higher prices, better trading and higher LNG volumes. Production was roughly the same, although after allowing for the effects of divestments, it was up 2%. Downstream took a hit: at $900mn, its earnings were down a third on Q2 2017, thanks to higher operating expenses and foreign exchange effects owing to the strong dollar, which reduced earnings by $300mn plus an additional $200mn in taxes.

Shell saw strong production growth in the US Permian shale basin, which has risen 85% since 2016 and there is more to come, van Beurden said. Drilling and completion costs have fallen by 40% over that period and "we can do more."

On its projects, it is very close to a final investment decision for LNG Canada on the west coast, but with the caveat that it has to be low-cost. It has awarded a conditional engineering, procurement and construction contract for it and van Beurden said: "It looks very promising but there are some key items: these are: affordability; competitiveness relative to Gulf of Mexico LNG; resilience in terms of cashflow; and attractiveness in comparison with other projects in Shell's portfolio. We are being thorough."

Prelude start-up recedes 

Its Prelude floating LNG project offshore Australia is still not producing LNG but it has begun exporting LPG. LNG is "on track for later this year," the CEO said, although previously it had been expected to be producing early this year, and before that, in 2017. It has not yet started producing gas from the wells although a cool-down cargo has arrived and "the team is now getting ready to start production this year."

Van Beurden said that he had not been in any political discussions between the US administration and European entities regarding Nord Stream 2 but he is following what is going on; Shell will continue to invest in it, and has "very strong commitments that it intends to honour" but "things may develop" that force it to stop, he told NGW. However, with production all over Europe in decline, he said that demand would have to be met from somewhere. He said he would only expect US LNG to come to Europe if that represented the highest netback for sellers. "Europe needs more imports, that means higher prices, and the need to build all the infrastructure that is needed," he said.

Regarding the decision to invest in Mauritania, he told NGW that Shell had decided to explore there a year ago, as "just one of many" opportunities the company needs to have to sustain its deepwater portfolio into the latter half of the next decade.  

Elsewhere, he said Shell had secured "knock-out" acreage in Mexico – now under a different government – and Brazil and it would take a few years to explore these. "We need to backfill our deepwater positions," he said: "These are great assets."