Spike in oil prices boosts Shell’s profits and dividends

• Royal Dutch Shell (RDSa.L) boosted its dividend after quarterly profits surged
• Shell launches a USD 2BN share buyback scheme
• US dollar (USD) plagued by disappointing US GDP data
• British pound to euro (GBP/EUR) exchange rate in a sideways range

Royal Dutch Shell (RDSa.L) lifted its dividends by almost 40% and launched a USD 2BN share buyback programme on Thursday after the group reported a significant jump in Q2 earnings.

Profits across the oil industry slumped in 2020 due to the introduction of COVID-19 restrictions and lockdowns, which confined many people to their homes.

However, the energy sector is recovering from last year’s pandemic-induced slump, with rivals, TotalEnergies (TTEF.PA) and Norway’s Equinor (EQNR.OL) announcing positive second-quarter results.

Shell said growth was driven by a rebound in oil prices, which have recovered more aggressively than anticipated, climbing above USD 70 a barrel.

The earnings report also highlighted the pressure on energy majors to revive weak share prices.

While Royal Dutch Shell’s (RDSa.L) shares jumped up by 3.5% on Thursday, outperforming peers BP (BP.L) and TotalEnergies (TOT.L), prices remained significantly lower than pre-pandemic levels, when oil prices were marginally lower.

Still, Shell Chief Executive Ben van Beurden said that Shell would be increasing its shareholder distributions from Thursday, lifting dividends and launching a share buyback programme as part of its broader ambitions to continue investing in the future of energy.

According to the Q2 report, adjusted earnings surged to USD 5.53BN – the highest level since the final quarter of 2018 and exceeding analyst forecasts for a USD 5.07BN profit.

Profits came from higher fuel prices and content created by Shell’s marketing division, home to the largest network of petrol stations on the globe.

Shell Chief Financial Officer (CFO) Jessica Uhl noted that the reopening of economies had driven fuel demand to between 90-100% of pre-COVID-levels, albeit aviation fuel consumption is flagging.

Shell raises dividends and launches share buyback scheme

The British-Dutch multinational oil and gas company raised dividends for the second successive quarter in 2021, with payments up by 38% to 24 cents in Q2.

It comes after the company slashed dividends for the first time in over seventy years in response to the challenges created by COVID-19. Shell cut dividends by more than half last year to 16 cents after coronavirus restrictions, and stay-at-home orders dragged oil prices below USD 20 a barrel.

Co-head of European Energy Research at RBC Capital Markets, Biraj Borkhataria, welcomed the news that Shell was boosting dividends, claiming that it was “extremely positive to see.”

The energy firm also launched a share buyback programme worth USD 2BN, which it aims to have completed by year-end.

It hopes that the share buyback initiative will boost distribution to shareholders by 20-30% of cash flow from operations initiated in Q2 2021.

Redburn analyst Stuart Joyner was surprised by how much Shell was willing to raise distributions, noting that the “scale of increase exceeded expectations.”

Company metrics have allowed senior management to let out a big sigh of relief, with the free cash flow indicator rising to USD 9.7BN between April and June – the highest level since Q1 2020.

However, Shell is facing growing pressure to meet the objectives outlined in its climate change strategy. A Dutch court ordered the multinational energy firm to accelerate plans to reduce its carbon footprint.

Shell faces pressure to accelerate climate change targets

The Dutch court ordered Shell to cut carbon emissions by 45% before the end of 2030, but Shell has refused to accelerate its strategy, stating that those targets by the end of the decade were “unreasonable”.

After 30% of shareholders rebelled against the board’s current strategy, Chief Executive Ben van Beurden said Shell plans to appeal against the court ruling to meet stricter climate targets.

During the meeting of shareholders, which included some of the companies largest investors, most voted favourably for activist investors who want the energy group to set firm targets regarding the winding down of nonrenewable fuel production.

Currently, Shell aims to reduce its carbon footprint by 20% before the end of 2030 – far lower than what the Dutch court demands.

However, Mr van Beurden said that asking “one company” to cut its average emissions by nearly 50% when industry rivals and EU member states aim to achieve only half of this during the same period is “not only unreasonable but doubly ineffective”.

Still, while Shell intends to maintain 2021 capital spending below USD 22BN, the group said that any future spending increases would be dedicated to low carbon initiatives.

Despite the risk of running into legal trouble, Shell’s substantial earnings update pushed the company’s share prices and the FTSE 100 higher on Thursday.

Although London’s blue-chip FTSE 100 has closed in red territory on Friday, Britain’s improving coronavirus situation could lift the index higher over the coming week.

US and European stock markets also gained on Thursday despite disappointing US gross domestic data (GDP), which disappointed and increased by 6.5% versus estimates of an 8.5% jump in economic output.

The British pound (GBP) also rallied to its best position against the euro (EUR) and the US dollar (USD) for the month, albeit gains have been short-lived.

Pound Sterling pulls back from monthly highs

Pound Sterling (GBP) is heading for its best week in 2021 as July comes to a close, courtesy of easing domestic coronavirus concerns and US dollar (USD) selling bias.

However, overbought conditions have poured cold water on GBP gains, and next week’s landmark Bank of England (BoE) event could inject further volatility into the UK currency.

The British pound (GBP) advanced amid signs that UK coronavirus cases were falling, inflation is rising, and optimism that the Bank of England (BoE) could be among one of the first developed market central banks to perform an interest rate hike.

Western Union Business Solutions Senior Analyst Joe Manimbo said: “With the Fed demanding a more robust labour market before tapering stimulus, this suggests that the US central bank will not be tightening policy before the Bank of England (BoE).

“Comments from the US have boosted GBP, and the UK currency has capitalised on greenback weakness, turning GBP/USD positive for July and 2021, evident by its marked rebound from five-month lows last week.”

While the BoE monetary policy meeting could give way to a wave of caution as policymakers deliver economic forecasts and new guidance on the future of interest rate policy and QE, Intesa Sanpaolo Economist Asmara Jamaleh remains optimistic about GBP’s outlook.

Asmara Jamaleh said pound Sterling (GBP) could have a more significant margin to advance than the single currency and the US dollar (USD) due to expectations for the BoE to reverse its stance on policy earlier than its American and European counterparts.

However, Monetary Policy Committee (MPC) member Jonathan Haskel erred on the side of caution during a recent speech, warning that Britain’s coronavirus situation was casting a shadow over the UK recovery outlook.

Economists believe that other MPC members are also wary of the COVID situation in Britain. Therefore the likelihood of the central bank raising interest rates in the near future was unlikely.

However, with UK inflation above the BoE’s 2% target and data showing that COVID-19 cases in the UK have fallen sharply over the past couple of weeks, the BoE could deliver an upside surprise.

Scientists also share the view that the third wave of the coronavirus, which was spreading throughout the UK, has peaked and is now breaking, raising the prospect of policymakers adopting a less dovish stance at the upcoming policy meeting on August 5th.

Yet, while the likelihood of the UK government reintroducing coronavirus restrictions has dwindled, pound Sterling (GBP) is struggling against the US dollar (USD) and the euro (EUR) heading into the North American session.

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate is trading 0.4% lower at USD 1.39, and the British pound to euro (GBP/EUR) currency pair has slumped by 0.1% to EUR 1.1727.

GBP/EUR has traded in a sideways range for most of the day, despite solid economic data from the euro area showing that sentiment in the Eurozone hit an all-time high during July.

Meanwhile, the annual German consumer price inflation rate surged to 3.1% in July, beating preliminary estimates of 2.9% and signalling a solid recovery in the EU’s largest economy.

The euro (EUR) has also found support in US dollar (USD) weakness by way of the currency’s negative correlation to the greenback.