Shell: 2022 performance still to come (NYSE: SHEL)

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Following their historic dividend cut in 2020, Shell (NYSE: SHEL) began to rebuild their shareholder returns in 2021 and despite their annoyingly low surface-level dividend yield of 3.51%, there was a very high shareholder return of 10% and more on the horizon when entering 2022, as was the subject of my previous post. After the tragic outbreak of war between Russia and Ukraine, Western oil and gas companies rushed out of Russia, potentially in a haphazard fashion. Despite recent share price weakness, fortunately in the grand scheme their investors can look beyond the Russian exit as their very high 2022 10%+ shareholder return is still at stake. come, which is discussed in this follow-up article which also covers their later release. results for the fourth quarter 2021.

Executive summary and ratings

Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This Google document provides a list of all my equivalent grades as well as more information regarding my grading system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.

Hull Ratings


*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their situation financial.

Detailed analysis

Shell cash flow


Following their very strong cash performance in the first nine months of 2021, it was rather disappointing to see their operating cash flow end the year at just $45.104 billion versus their result of $36.935 billion during of the first nine months which, if annualized, implied a full year of nearly $50 billion, especially as oil prices firmed in the fourth quarter. Fortunately, this was simply due to a very large temporary working capital build of $10.367 billion, which if removed sees their underlying operating cash flow at a whopping $55.471 billion for 2021.

Due to this very large working capital build, it saw its free cash flow end in 2021 at $20.521 billion and while still a massive result it remained essentially unchanged from compared to its result of 20.303 billion dollars in the first nine months. Fortunately, this all-important working capital build should reverse in 2022 and so, conversely, the main disappointment in my opinion remains their continued forecast of dividend growth of just 4% per year, as shown slide seventeen of their fourth quarter 2021 earnings presentation. Even after increasing their quarterly dividends to $0.25 per share or $0.50 per ADR as planned for the upcoming first quarter of 2022, they will remain well in below their pre-Covid-19 level of $0.94 per ADR despite their dividend payments of $6.253 billion in the 2021 session. well below their free cash flow. Fortunately, these dividends should be boosted by very large share buybacks which should easily exceed $10 billion in 2022, resulting in a very high shareholder return of over 10%, as my previously linked article l explained in detail for any new reader.

Despite this recent quarter-to-quarter volatility, business is actually business as usual, with the biggest news clearly being the sad outbreak of war in Eastern Europe following the invasion Russian from Ukraine. As well as creating a humanitarian disaster, it drew attention to Europe’s dependence on Russian gas exports and accelerated its efforts to curtail the search for new supplies, as discussed in detail. in my other post. While this highly uncertain geopolitical shock has many moving parts, this aspect is expected to boost their integrated gas business segment which sees them as one of the largest LNG producers in the world, as seen in the slide below.

Shell's integrated gas business area

Presentation of Shell’s fourth quarter 2021 results

Their integrated gas business segment, which notably houses their LNG production, recorded underlying operating cash flow of $18.274 billion in 2021 excluding temporary impacts from working capital movements, thus representing a significant portion of about a third of their $55.471 billion total. It can also be seen that not only are they a leading LNG producer, but their integrated gas business segment also represents a growth area within their business, unlike their oil business segment which is more focused on a controlled decline as they work towards their own energy goals.

Like many other Western companies, they are pulling their business out of Russia, which they say will lead to write-downs. Even if these are not ideal, the value of their Russian assets is only around $3 billion at the end of 2021, which is equivalent to less than a quarter of their operating cash flow. which makes it relatively insignificant in the grand scheme even though these are completely lost. While the future is highly uncertain, the loss of assets and revenue resulting from a potentially disorderly exit from Russia will most likely be easily recouped through rising oil and gas prices which have already driven prices higher. oil to triple-digit levels, increasing what they are receiving elsewhere from their vast array of assets and thus making recent share price weakness unwarranted when looking beyond overall writedowns.

Shell's capital structure


Despite their lack of additional free cash flow throughout the fourth quarter of 2021, they still managed to see their net debt end the year significantly lower thanks to their $8.843 billion in proceeds from their shale disposal, which more than made up for their $3.541 billion in combined dividends and share buybacks. This saw their net debt end 2021 at $52.116 billion and therefore a solid $5.202 billion or 9.08% lower than its level of $57.318 billion when the previous analysis was carried out after the third quarter. Considering Russia’s exit, since these assets only carried a value of about $3 billion on their balance sheet at the end of 2021, they are insignificant compared to their $175.326 billion in equity. . This means that even if they were written off completely with zero cash proceeds, it would barely be noticeable in their balance sheet and therefore in their leverage ratio.

Shell leverage ratios


After seeing their net debt continue to plunge through the fourth quarter of 2021, it was no surprise to see their leverage continue alongside their net debt to EBITDA ratio ending the year at 0.98. In addition to representing a solid improvement from its result of 1.28 in the previous analysis after the third quarter of 2021, this also now sits below the 1.00 threshold for the very low territory. Looking elsewhere, their debt-to-operating net cash flow actually increased slightly to 1.16 from its previous result of 1.07, although this was only due to their very large working capital build-up. and had it been removed, it would have ended 2021 at just 0.95, thus also in very low territory.

Looking to 2022, their immense free cash flow is expected to cause their leverage to plunge with net debt resulting in a reduction of around $20 billion even before the Russian-Ukrainian war drives up oil and gas prices. , which should push their leverage ratio as low as just 13.50%. This aspect was discussed in detail in my previously linked article for all new readers, who therefore could easily see their combined share buybacks and dividends increase relatively later in 2022 or otherwise in 2023, thus increasing their already very high estimate. return to shareholders well over 10%.

Shell liquidity ratios


Unsurprisingly, their liquidity remains solid with their current and cash ratios at 0.95 and 0.28 respectively. While these are lower than their respective results of 1.21 and 0.37 when performing the previous analysis after the third quarter of 2021, they are essentially unchanged from a practical point of view. Fortunately, even a disorderly exit from Russia doesn’t necessarily impact their liquidity, especially given their prospects of generating immense free cash flow. As this is a massive undertaking, there is no reason to expect any problems with the supply of cash needed to refinance debt maturities and for other general purposes in the foreseeable future, even if central banks tighten monetary policy.


It is morally wrong to say that they are the victors in this otherwise dreadful war, although objectively speaking their exposure to Russian assets is relatively insignificant and now that Europe is seeking to secure gas supplies elsewhere, their wide range of LNG production seems particularly useful. This means that their very high potential of more than 10% shareholder return in 2022, reported in my previous article, remains intact and, therefore, investors can look beyond the exit of Russia, which does not come as no surprise that I still believe in a strong buy. the rating is appropriate.

Notes: Unless otherwise stated, all figures in this article are taken from Shell’s Quarterly reportsall calculated figures were performed by the author.

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