London – Shell’s recent financial performance reveals a complex picture of continued investor payouts amidst declining profits, raising questions about the long-term sustainability of its current strategy. The oil giant reported a 22% fall in adjusted earnings to $18.5 billion (£13.6bn) for , down from $23.7 billion in , a downturn attributed to steadily falling global oil market prices.
The company’s fourth-quarter earnings, reported at $3.25 billion, fell short of analyst expectations of $3.5 billion and represented a significant decrease from the $5.4 billion reported in the preceding three months. Despite this dip, Shell has continued to prioritize returns to shareholders, announcing a 4% increase in dividends and a $3.5 billion share buyback – marking its 17th consecutive quarter of at least $3 billion in repurchases.
This commitment to shareholder returns has come at a cost, however. Shell’s net debt climbed to $45.7 billion by the end of , representing almost 21% of its total capital, up from $41.2 billion at the end of September. The increase in debt underscores the company’s willingness to leverage its financial position to maintain its dividend and buyback programs, even as profits decline.
The broader market context contributing to Shell’s performance is a significant drop in oil prices. Crude fell below $60 a barrel at the end of , reaching levels not seen in nearly five years. This decline was linked, in part, to growing expectations of a potential peace deal between Russia and Ukraine, which could lead to an increase in global oil supply if Western sanctions on Russian exports were lifted. Oil prices slumped by almost 20% throughout , marking the largest annual loss since the COVID-19 pandemic and the first instance of three consecutive years of annual losses in the oil market.
Shell’s Chief Executive, Wael Sawan, characterized the year as one of “accelerated momentum” for the business, citing “strong operational and financial performance across Shell.” He highlighted the company’s generation of $26 billion in free cash flow, progress in portfolio focusing and $5 billion in cost savings since , with further savings anticipated.
The company’s strategy stands in contrast to that of BP, which reported a 49% drop in first-quarter profits to $1.38 billion, down from $2.7 billion in the same period last year. While both companies are navigating a challenging energy landscape, Shell appears to be prioritizing shareholder returns through debt-fueled buybacks and dividend increases, while BP’s performance suggests a different approach.
The decision to maintain substantial share buybacks and increase dividends, despite declining profits and rising debt, signals Shell’s confidence in its long-term prospects and its commitment to rewarding investors. However, it also raises questions about the company’s ability to balance shareholder returns with the need for investment in future energy projects and the transition to a lower-carbon economy. The continued prioritization of payouts, even as oil prices fall, suggests a focus on short-term gains over long-term strategic shifts.
Looking ahead to January , the 4% dividend increase is expected to reinforce Shell’s position as an income stock, potentially attracting investors seeking stable returns. However, the sustainability of this strategy will depend on the future trajectory of oil prices, the company’s ability to control costs, and its success in navigating the evolving energy landscape. The company’s debt level will also be a key factor to watch, as further increases could raise concerns about its financial stability.
Shell’s first-quarter net income of $4.78 billion surpassed analyst expectations, despite a 35% year-over-year decline. This performance, coupled with the ongoing share buyback program, demonstrates the company’s continued ability to generate cash flow even in a challenging market environment. However, the long-term implications of its debt-fueled shareholder returns remain to be seen.
