2023-11-02 21:11:24 ET
Summary
- Shell's Q3 2023 results show robust sequential growth, with a 2.4% increase in revenue and a 125% increase in net attributable income.
- However, compared to last year, revenues declined by 20.3% YoY, but expenses declined by 23.6%, resulting in a rise in reported earnings.
- Future catalysts for Shell include higher oil prices, continued share buybacks, and a decent dividend yield, making it an attractive investment option.
Energy major Shell ( SHEL ) has seen a nice 5.1% uptick in price as I write after its third quarter (Q3 2023) results were released earlier today. It’s now up by 22.7% year-to-date [YTD] and has also gained almost 16% since I last wrote about it in August. Here I take a closer look at its latest numbers to assess what’s making it tick and what’s next in store for it.
Robust sequential growth in Q3 2023…
The most striking facet of the latest results is the divergence between sequential and year-on-year (YoY) growth. While the company has seen a marked improvement quarter-on-quarter (QoQ), on improved realised oil prices and upstream production, the drag from the previous quarters shows up in YoY figures.
First, a look at the sequential growth. Shell saw a 2.4% QoQ revenue increase in Q3, 2023, which, coupled with a 5.6% decline in total expenditure resulted in higher margins. The margin for net income attributable to shareholders has risen to 9.2% (Q2 2023: 4.2%).
But the real icing on the cake, which is evident from the improved margin, is the massive 125% increase in net attributable income. This has resulted in an even higher reported diluted earnings per share [EPS] of 128.3%, because of continued share buybacks. Adjusted EPS rose by 24% QoQ.
…but weakness is still visible compared to last year
Revenues, however, declined by 20.3% YoY during the quarter, reflecting that while realised prices have improved over the quarter, they have still on average been lower than during the same time last year (see chart below). With a significant 23.6% decline in expenses though, the company has still seen a rise in reported earnings. Attributable income has risen by 4.5% and diluted EPS is up by 14.1%. Adjusted EPS has however seen a decline of 28.5% over this time.
Revenues slowed down by a smaller 15% for the first nine months of the year (9M 2023) as compared to Q3 2023. However, due to a smaller 10.4% decline in expenses, the earnings figures contracted. EPS fell by 35.3% on a reported basis for 9M 2023 and 23.8% on an adjusted basis.
Future catalysts
With a 40.8% decline in attributable income for 9M 2023, it appears very unlikely that Shell would end the year with earnings growth. However, as the latest numbers show, with sustained oil prices, the blow might be softened. There's a good chance that they will be, as is discussed next. This, along with continued buybacks and dividend payouts can continue to buoy the Shell price.
Higher oil prices expected
Oil price forecasts are generally positive. Bank of America, for instance, has raised its forecast for Brent crude to USD 96/barrel for Q4 2023. For context, Brent is currently trading at USD 86/barrel.
Even the US’s Energy Information Agency [EIA] is bullish on Brent prices , though slightly less than BofA, expecting them to average at USD 90.65. It also sees the WTI crude averaging at USD 86.65, compared to the current level of USD 81.5/barrel. This then bodes well for Shell’s earnings for Q4 2023. But even beyond that, the forecasts for 2024 for both oil and gas prices are positive as per the EIA too (see table below).
Oil and Gas Price Forecasts (Source: Energy Information Agency)
Continued buybacks
Additionally, the EPS will continue to benefit from share buybacks. After completing USD 3 billion worth of buybacks in Q3 2023, it has now announced another USD 3.5 billion in buybacks to be completed by the end of Q4 2023.
Decent dividend yield
Shell’s dividends are worth considering too. Its trailing twelve months [TTM] dividend yield at 3.54% might be exactly the same as the sector median, but its forward yield at 4.05% is actually higher than the 3.62% for the sector.
It’s also hard to miss that despite the softening in earnings this year, the dividend per share is up by 27% for 9M 2023. The company isn’t overdoing the dividends either. It has a comfortable TTM payout ratio of 26.3%, which indicates that even if it doesn't increase dividend payouts for the next year, it may well keep them at the current levels.
Favourable market multiples
After the latest numbers, Shell’s TTM GAAP price-to-earnings (P/E) ratio is at 8.1x while the TTM non-GAAP P/E is at 7.7x. These are slightly higher than the earlier numbers but still compare favourably to the energy sector's median ratios of 9.2x and 8.9x, respectively.
The forward P/Es are similarly attractive. Assuming that the Q4 2023 earnings show the same YoY trend as seen in Q3 2023, the forward GAAP P/E for the full year 2023 is at 7.8x while the non-GAAP forward P/E is at 8.4x. This compares to the respective energy sector ratios of 10.44x and 10.43x.
The market multiples indicate that there's at least a 10-15% upside to Shell right now. And likely higher.
What next?
I still believe there could be risks ahead considering if global macroeconomic conditions take a turn for the worse. But this is tempered by the bullish forecasts for oil and gas prices, which also indicate that demand can remain strong. These forecasts add to the optimism about Shell’s future earnings after the pickup seen in Q3 203, particularly in profits.
The company’s consistent share buybacks and also its dividends are positives to consider when contemplating an investment in the stock or its ADRs. Further, both the forward and TTM P/E ratios look favourable, indicating a double-digit upside to Shell.
I’m upgrading the rating again, this time to Buy. But with a caveat. It's only for the short term for now, going up to the end of Q4 2023 and the start of next year. Both the company’s outlook and the state of the macroeconomy will determine whether it remains a buy after that. So far, there's nothing to indicate a significant turn for the worse, but the macroeconomy isn't out of the woods yet, so a reassessment of the stock in another quarter would be a good idea.
For further details see:
Shell: Improved Earnings, Oil Price Outlook Boost Confidence (Rating Upgrade)