2023-12-06 06:18:24 ET
Summary
- OPEC+ countries announce additional voluntary cuts to oil production to support price stability.
- We like Shell's pragmatic approach to capital allocation priorities, favoring shareholders' remuneration.
- Lower CAPEX, higher buyback, and a discount in valuation vs. its peers make SHEL a buy.
Following the recent OPEC+ decision to cut oil production, we are back to comment on Shell plc (SHEL) (RYDAF). Looking at the press release , we reported how these voluntary oil cuts are calculated from the 2024 required production level and are a plus to the voluntary cuts previously announced in April 2023 and later extended until the end of 2024. In early June, our internal team had already commented about the 1.6 million oil supply reduction per day. This 2.2 million lower output fully supports Mare Evidence Lab's oil price forecast, which is set at $80 per barrel. Despite that, as already mentioned, " even if this price per barrel will not be achieved, at the very least, we see OPEC+'s message supporting oil companies, even in a recessionary environment. Therefore, we are confident that this news is positive for oil E&P and integrated companies, which will directly benefit from the expected price increase." Our buy rating is backed by 1) a CAPEX allocation toward green investment, 2) cost-saving initiatives, and 3) supportive remuneration across the cycle. There is also a trade-off between a higher risk profile for European Integrated Oil Companies with their investments in low-carbon technologies vs. European market money flows that sustain stock price appreciation in ESG developments.
After having analyzed TotalEnergies , we decided to upgrade Shell's buy rating on the MACRO supportive news and also for a higher remuneration payout. We are above Wall Street estimates. Very briefly, we are looking at the company's Q3 results , providing our forward-thinking analysis and changes in estimates.
Starting with the bottom line, Shell's net income came in at $6.2 billion and was in line with company consensus. Underlying CFFO (excluding working capital effect) post-interest expenses reached $10.5 billion. There was a decrease in working capital requirements of $433 million. The company's adjusted EBITDA was $16.3 billion, supported by solid results in the upstream and chemicals segments, partially offset by weaker-than-expected renewable and marketing results. Total upstream output was broadly aligned with our forecast and was down by 1% quarterly. On a balance sheet basis, net debt was unchanged at $40.5 billion, and Shell achieved a cash flow from operations of $12.3 billion. Post Q3 results, we believe that Shell delivered a constructive view on CAPEX allocation and a cash conversion 10% ahead of Wall Street consensus.
Looking ahead, Shell's top-end investment CAPEX guidance was lowered to $23/$25 billion from a previous estimate in the $23/$26 billion range. Therefore, we are lowering our year-end CAPEX plan estimates, leaving our net debt output unchanged. This is due to a higher buyback forecast; in our numbers, we estimate a $3.5 billion share-repurchase in Q4, which is ahead of analysts' consensus estimate of $3 billion. This led Shell H2's total buyback to over $6 billion, exceeding the company's minimum $5 billion baseline presented during the mid-year capital market day. Here at the Lab, we forecast a 12-month trailing distribution in the upper half of Shell's 30-40% CFFO range. On a micro basis, this is supported by higher deepwater performance and post-Q3 more robust trading performance. On a negative note, we left our year-end debt development unchanged due to higher corporate costs, which are expected to be $550/$750 million for Q4 2023. Despite lower volume from Egypt and ongoing maintenance at Prelude, the company also expects higher LNG production.
In a nutshell, we support Shell's investment and reiterate our buy rating target. This is mainly due to the following:
- Lower OPEC+ volume will drive higher oil prices;
- The company also estimates higher refining margins;
- There is a pragmatic approach to Shell's capital allocation priorities, focusing on higher shareholders' distribution.
Conclusion and Valuation
Factoring in the latest OPEC plus news and post-Q3, we anticipate modest 12-month EPS revision changes. In detail, Shell's cash flows and cash return should see an upward revision. Our projection estimates an oil price of $85 and $80 per barrel in 2024 and 2025-2026, respectively. According to our numbers, we derive an FCF yield of 12.5% with a P/E of 7.3x. Shell and Total have leverage thanks to their Integrated Gas ((IG)) and LNG divisions. In particular, the IG division provided material exposure to the gas segment backed by an outstanding assets scale and a global reach. The company is also set to sustain higher oil volumes for longer. This price environment also supports robust shareholders' remuneration. In line with our forecast, the total payout is set at 30-40% CFFO (compared to a previous guidance of 20-30%) and a continued 4% DPS CAGR. In our visible period, Shell might deliver a cumulative return of 30% of its entire market cap. Looking at the multiples, here at the Lab, we target a 20% sector discount vs. USA peers. 2024/2025 P/E multiple is set at 11.0x, and from this, adjusting Shell's historical discount to the sector, we arrived at a P/E target of 8.3x. Therefore, we decided to increase Shell's valuation from 2.900 pence to 3.000 pence ($74 in ADR). Shell risk section is included in our previous coverage .
For further details see:
OPEC+ Decision Will Likely Support Shell Earnings