The Shell (LSE: SHEL) share price is down around 5% this year. This is despite Europe’s largest oil and gas company making record profits of almost $40bn in 2022. The figure was double 2021’s number and smashed the previous record of $28.4bn set in 2008.
These figures were reflected in rewards for shareholders as well. Shell increased the Q4 dividend per share by 15% to 28.75 cents, bringing the year total to $1.04. It also announced a share buyback of $4bn, expected to be completed by the Q1 ’23 results announcement.
These are great figures, but for me what is important is whether this sort of performance will be sustained.
Fossil fuel prices likely to stay high
I think it is very likely that the factors that drove Shell’s stunning results will remain for some time.
For a start, there is little chance of any peaceful resolution to the Russia-Ukraine war any time soon. This means sanctions on Russian oil and gas supplies will remain in place. There is also little chance of sanctions on major oil and gas producer Iran being lifted by the US either. Both sets of sanctions mean less oil and gas in the market, and this will keep prices high.
Oil and gas prices were already rising on two other factors. The first was a surprise production cut earlier this month by the OPEC+ cartel. The second was further evidence of an economic pickup in China, the world’s largest net importer of oil.
Longer term, many analysts have warned that recent underinvestment in drilling and production will lead to repeated fossil fuels shortages. This means oil and gas prices stay higher for longer. And this means great prospects for Shell’s core business.
Energy transition strategy in place
This said, it also has a strategy by which it can survive and prosper in a cleaner energy world. The company aims to become a net-zero emissions business by 2050. To this end, it said that at least a third of its $23-$27bn capital expenditure this year will go to renewables.
And it has already made some big renewables deals, happily of the type that will also make it money.
Last year, it won a bid with Eneco to develop a 760 megawatts offshore wind power project in the Netherlands. It also bought Daystar Power Group, a provider of solar-as-a-service and power-as-a-service solutions to customers in West Africa. And it also acquired Green Tie Capital’s platform with 10 solar energy projects across Spain.
The risk if I were to buy shares in Shell is that oil and gas prices may fall. Or there may be an environmental disaster of the type that has involved oil companies in the past.
However, for me these are far outweighed by the positive factors in Shell. It is a profit-making machine in oil and gas, and it can be one in renewables as well. It rewards its shareholders very well, with regular good dividend payouts and buybacks. And its move from fossil fuels to renewables is being very carefully managed.
I have holdings in the energy sector, but even with these I am seriously tempted to buy Shell shares. If I did not already have exposure to the sector, I would buy the stock right now at the current knock-down price.
