ii view: Shell flags potential $1 billion biofuel charge

Second-quarter trading update to 30 June

• Expects integrated gas production of between 940-to-980 thousand barrels of oil equivalent per day (kboe/d), compared to a previous estimate of 920-to-980 (kboe/d)
• Taking a non-cash post tax impairment of between $1.5 to $2 billion

ii round-up:

Energy giant Shell (LSE:SHEL) today largely left second-quarter performance expectations unchanged but detailed an impairment charge of up to $2 billion following previous operational changes. 

A charge of up to $1 billion comes in the wake of management’s recent decision to temporarily pause construction of a biofuels facility in the Netherlands given changed market conditions. A further $0.8 billion relates to the previous sale of chemical production assets in Singapore. 

Shares in the FTSE 100 giant eased 0.6% in UK trading having come into this latest news up by just over a tenth year-to-date. That’s ahead of a gain of around 6% for European rivals BP (LSE:BP.) and TotalEnergies SE (EURONEXT:TTE) and similar to the rise for Brent crude in 2024. The FTSE 100 index itself is up 7% year-to-date. 

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Just days ago, Shell announced that work for a new 820,000 tonnes a year biofuels facility in Rotterdam had been paused. The decision came in order to assess project delivery and ensure future competitiveness. 

Shell invested $7.9 billion in low-carbon energy and non-energy products during 2023, down from $8.2 billion in 2022. 

Production for the integrated gas division during Q2 is expected to be between 940 and 980 (kboe/d), marginally better than its previous estimate of 920-980 (kboe/d). 

Second-quarter performance for the downstream marketing business is expected to prove similar to Q1. 

Q2 results to the end of June are due 1 August. 

ii view:

In business for more than 100 years, the FTSE 100 index giant changed its name in 2022 from Royal Dutch Shell to just Shell and moved its headquarters to the UK. It employs over 100,000 people across 70 countries. Competing against rivals such as Exxon Mobil Corp (NYSE:XOM) and even SSE (LSE:SSE) given its renewables business, Shell’s strategy includes further simplifying the company and sharpening performance.

For investors, the uncertain economic outlook, particularly for China, continues to offer uncertainty regarding energy demand. Global geopolitical tensions and the speed with which the West’s relationship with Russia changed should not be forgotten. Windfall taxes introduced following higher energy prices and the war in Ukraine, persist, while Shell’s own dialling back of investments in climate change friendly operations does not sit comfortably with all.  

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On the upside, a diversity of operations across oil, gas, chemicals, and alternatives regularly allows one area of strength to counter another one of weakness. Cost rises for businesses generally have eased. Expected interest rate cuts later this year could boost demand for energy, while net debt has reduced from pandemic levels.

In all, and despite ongoing risks, both a consensus analyst fair value estimate of £32 per share and a forecast dividend yield above 3.5% should continue to underpin Shell’s position in many investor portfolios.  

Positives: 

• Diversity of operations
• Reducing net debt

Negatives:

• Uncertain economic outlook
• The weather can raise operational challenges

The average rating of stock market analysts:

Buy