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Shell to Ramp Up Buybacks & Dividends on Growing Cash Pile

Zacks Equity Research
Shell (RDS.A) is expected to receive a 50% stake in Gazprom Neft's subsidiary, Meretoyakhaneftegaz.

In view of Royal Dutch Shell plc’s RDS.A commitment of returning value to its shareholders, the company is set to shower investors with generous dividends and buybacks after 2020, as a show of confidence in cash generating ability.

In a strategy update, the European energy giant announced plans to return at least $125 billion to its shareholders via dividends and share repurchase in the 2021-2025 time frame, as long as Brent crude do not fall below $60 per barrel. The projection compares favorably with the distribution of $90 billion between 2016 and 2020. The potential payout will be more than double the total distribution within 2011-2015.

Notably, even amid gloomy market conditions, Shell reported the biggest profit among peers in 2018. It managed to retain the top position among peers in the free cash flow (FCF) parameter. The metric recorded remarkable 43% y/y growth in 2018. While the firm is riding high on FCFs, what’s surprising is the fact that it has kept its dividend frozen for 20 consecutive quarters. However, the company plans to hike dividend payout after the completion of the $25-billion share repurchase program by 2020-end.

The Anglo-Dutch supermajor expects FCF from global operations to increase around $35 billion per year by 2025, provided Brent crude stays around $60/barrel. The projection is higher than $28-33 billion forecast for 2020.

The firm plans to incur capital spending of around $30 billion per year within 2021-2025, with a ceiling of $32 billion. This represents a modest increase from its current annual capex budget of $25-$30 billion. Around 50% of the capex will be directed toward the gas and chemicals business. While most of the remaining capex will be allotted to the upstream division, a reasonable portion of the capital outlay will be devoted to the emerging power supply business.

Shell — which has realigned its portfolio into three broad categories namely Core Upstream (conventional oil and gas from deepwater and shale plays), Leading Transition (including Integrated Gas, Chemicals and Oil Products) and Emerging Power (focusing on greater levels of electrification) — aims to generate overall ROCE of more than 12% by 2025, reflecting an uptick from 9% at the end of first-quarter 2019.

As we know, it is targeting to become the biggest electricity power company by 2030. The company now envisions investing up to $3 billion per year in the New Energies division within 2021-2025, primarily to enhance its position in the power sector.

While renewable energy has long been considered as a niche market, things have been changing amid climate change concerns, with many energy giants being compelled to enhance their green initiatives. Although it is difficult for Shell to convince people fully about green initiatives, given that it pumps 3.7 million barrels of oil per day, it is a fact that the firm has outpaced peers such as ExxonMobil XOM, Chevron CVX and BP plc BP, among others, in this regard.

Shell became the first oil company to link executive pay with carbon emissions for combating climate change. The company has been on renewable acquisition spree of late, having collaborated with IONITY, New Motion, First Utility and Silicon Ranch, as it attempts to diversify its portfolio beyond oil and gas. The Zacks Rank #3 (Hold) company is set to acquire Eneco, sonnen and Cleantech, emphasizing its increasing shift toward lower-carbon fuels. It has pledged to lower carbon emissions by 50% over the next five decades via sharpening focus on renewables and biofuels. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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