Shell PLC

LSE:SHEL

Earnings Call Analysis

Shell Maintains Strength Amid Transition

Shell delivered a strong performance in 2023, with the second-highest cash flow from operations in its history. The company achieved notable safety improvements and is progressing towards its cost reduction target of $2-3 billion by 2025, already accomplishing $1 billion in savings. By focusing on portfolio optimization and advanced technologies like AI, Shell managed production growth, adding over 200,000 barrels of oil equivalent per day from new projects. These efforts bolster energy security and cash flow longevity. Investment in low carbon energy reached $5.6 billion, contributing to scope 1 and 2 emissions reduction beyond 60% of their 2030 target. Financially, Shell reported $28.3 billion in adjusted earnings for the year and announced a 4% dividend increase, capping a 20% rise over the past 12 months. The company also started a new $3.5 billion share buyback program and aims to continue returning 30-40% of cash flow from operations to shareholders.

Strong Financial Performance Amid Challenges

Shell has weathered external uncertainties and volatility to deliver the second highest cash flow from operations in its history in 2023. The company has executed capital discipline by spending at the lower end of the set $23 billion to $27 billion range, while already securing $1 billion in cost reductions on its way to a targeted $2-3 billion by the end of 2025. These cost savings represent a strategic adaptation in the face of the energy transition, focusing on portfolio optimization and organizational efficiency.

Safety and Operations Excellence

While personal safety metrics in the last year fell short of 2022's performance, process safety reached a new record, indicating a strong commitment to safety in operations. Furthermore, Shell is making strides in incorporating new technologies like artificial intelligence and sensor data analytics to enhance asset performance, leading to early problem identification and improved operational efficiency.

Strategic Portfolio Adjustments

Shell continued to refine its portfolio by agreeing to sell its Nigerian onshore subsidiary, SPDC, recognizing the importance of making selective choices about where to compete. The company is also investing in new projects, with recent startups contributing over 200,000 barrels of oil equivalent per day and expected to contribute more than 0.5 million barrels by 2025, ensuring energy security and cash flow longevity.

Investment in Low Carbon Energy

Codifying its commitment to the energy transition, Shell allocated $5.6 billion to low carbon energy investments in 2023. Notable developments include the Nature Energy acquisition and the CrossWind JV, which will power Europe's largest electrolyzer, Holland Hydrogen I, illustrating the company's dual focus on meeting today’s energy demands and shaping the future energy landscape.

Financial Return and Shareholder Value

The financial results from Q4 and the full year of 2023 reflect a continued emphasis on creating shareholder value. The company delivered adjusted earnings of $7.3 billion for Q4 and a total of $28.3 billion for the year, despite $4 billion in post-tax impairments due to macro outlooks and strategic choices. From the impressive cash flow from operations totaling $54.2 billion, Shell returned $23 billion to shareholders and announced a new $3.5 billion share buyback program to be completed by May 2024. Dividends were also increased by 4%, showcasing a commitment to a progressive dividend policy.

Reducing Emissions and Looking Forward

Shell reported a reduction in Scope 1 and 2 emissions, achieving over 60% of the target set for 2030 halfway through the timeline. Looking ahead to 2024, the company will persist in focusing on performance, discipline, and simplification, promising to maintain shareholder distributions of 30-40% of cash flow from operations, with the broader goal of creating more value with fewer emissions. Investors can anticipate updates at upcoming events, including the LNG Outlook and Annual ESG Event.

Earnings Call Transcript 2023-Q4

[Wael Sawan, executive]

Welcome, everyone. Today, Sinead and I will present to you the 2023 fourth quarter and full year results. We had another year of very strong performance, delivering the second highest cash flow from operations in Shell's history despite the external uncertainty and volatility.

Starting with safety, which remains our top priority. Our personal safety results last year were slightly lower than in 2022, and our teams are determined to make sure 2024 is a year of improvement. I am, however, really pleased that our process safety results set a new record for Shell, confirming our top-tier performance in the industry. We are also making good progress across the targets outlined at our Capital Markets Day and expect more to come as we progress through 2024 and beyond.

In 2023, we demonstrated our strong commitment to capital discipline by delivering at the lower end of our $23 billion to $27 billion range. In addition, we have already achieved $1 billion in structural cost reductions, well on our way to a reduction of $2 billion to $3 billion by the end of 2025. This reduction is a first step. This is not a one-off change program. We are building the capability to continuously adapt to changes through the energy transition. The reductions will be staggered. The most significant contribution in the short term comes from focusing on where we play, which are essentially portfolio choices. And at the same time, we are emphasizing a bottom-up focus to create a leaner, more agile organization that delivers more value.

We are also leveraging new technologies such as artificial intelligence to improve the performance of our assets. We have millions of sensors, collecting over 5 trillion rows of data that our AI models, combined with our conventional models used to monitor equipment 24 hours a day, 7 days a week, alerting engineers to anomalies from a distance. This enables us to intervene and fix issues early, improving our performance, and we continue to high-grade our portfolio and position the company for growth into the future.

This past month, we agreed to sell our Nigerian onshore subsidiary, SPDC, subject to government approvals and other conditions. This is an important step for the company, and we hope to complete the deal as soon as it's possible.

In 2023, we saw production growth with the startup of a number of key new projects in our advantaged upstream business. The projects which came on stream this past year at their peak, will add over 200,000 barrels of oil equivalent a day. They are part of our larger funnel set for start-up by 2025. Together at their peak, all projects will add more than 0.5 million barrels of oil equivalent a day to our production. And they will enable us to continue providing the energy security that the world needs while delivering cash flow longevity into the future. We also continue to invest to help enable the energy transition in areas where we can create value.

Last year, we invested $5.6 billion in low carbon energy, such as our Nature Energy acquisition and the CrossWind JV, which will supply renewable power to Holland Hydrogen I, Europe's largest electrolyzer.

In short, we're working hard to deliver the energy the world needs today and we're helping to build the energy system of the future. Our relentless focus on performance, discipline and simplification allowed us to deliver compelling returns and create more value for our shareholders in 2023. Our shareholder distributions for the year were over 42% of our CFFO. And today, we increased our dividend by another 4%, taking our total increase over the last 12 months to around 20%. We continue to progress towards our destination of a net zero emissions business.

Our preliminary results show that we have further reduced our Scope 1 and 2 emissions in 2023. We are only halfway through the time line to our 2030 target, yet we have already achieved more than 60% of the reductions needed to reach the target.

With that, let's go to Sinead for more financial results.

[Sinead Gorman, executive]

Thank you, Wael. We delivered strong results in Q4, driven by our strong trading and optimization in LNG and robust operational performance. One of this quarter's highlights came from QGC in Australia. This quarter, they had their highest ever LNG production, which helped deliver cargo #1000 since startup.

Moving to our financial results. Our adjusted earnings were $7.3 billion for the quarter and $28.3 billion for the full year. In the fourth quarter, we saw $4 billion in post-tax impairments driven by macro outlooks and portfolio choices in line with what we announced at Capital Markets Day. We generated $12.6 billion of cash flow from operations, contributing to a total of $54.2 billion for the full year 2023, our second best year ever.

Our strong performance allowed us to return $23 billion to our shareholders, delivering in excess of our 30% to 40% CFFO range. And today, we have announced a new $3.5 billion share buyback program, which we expect to complete by the time of our Q1 results announcement in May. We have also announced a dividend increase of 4%, in line with our progressive dividend policy. Our balance sheet remains strong with net debt reducing by $1.3 billion year-on-year.

And looking forward, in 2024, we will continue to target shareholder distributions of 30% to 40% of our cash flow from operations through the cycle, while maintaining our focus on delivering more value with less emissions. Now I will hand back to Wael for more on what's coming next.

[Wael Sawan, executive]

Thank you, Sinead. So this was another year of strong results for Shell, marked by one of our highest ever annual adjusted earnings and cash flow from operations. We achieved this and much more despite volatility in the energy markets.

In 2024, we will focus on delivery of our first sprint through performance, discipline and simplification building on what we have achieved in 2023. By focusing on areas where we have differentiated capabilities and core competencies, we aim to be the investment case through the energy transition.

In the coming weeks, we hope you can join us for our LNG Outlook and our Annual ESG Event, which will also cover the Energy Transition Strategy 2024 Publication. Thank you.