Shell plc (NYSE:SHEL) Q4 2022 Earnings Call Transcript

Shell plc (NYSE:SHEL) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Welcome to Shell’s Fourth Quarter 2022 Financial Results Announcement. Shell’s CEO, Wael Sawan; and CFO, Sinead Gorman, will present the results, then host a Q&A session. . We will now begin the presentation.

Wael Sawan: Hi. I’m Wael Sawan, and I’m pleased to present to you for the first time as Shell’s CEO. Today, alongside Sinead, we’ll be presenting Shell’s fourth quarter and full year results. I’d like to start by thanking Ben for his leadership over the last 9 years and for building the strong foundations that I now inherit. We have a world-class organization with exceptional people, a leading portfolio and the right strategy, all of which, I believe, position us very well for the future. 2022 was a year in which energy security was front and center. The world mobilized. We saw policy progress with Fit for 55 in Europe and the introduction of the Inflation Reduction Act in the U.S. This is evidence of moving from ambition into action.

Despite this progress, the energy system still faces huge challenges, and it continues to need bold, decisive actions by companies, governments and society at large. The world requires a secure supply of affordable energy and, at the same time, needs this energy to be increasingly low carbon to make the transition to a net-zero emissions energy system. In short, the world needs a balanced energy transition. Moving too fast by dismantling the current energy system before the new system is ready could worsen the situation. But moving too slowly could waste precious time and lose the momentum to build necessary solutions for low-carbon energy at scale. However, this transition will not be linear and will play out with different solutions needed at different times in different places across the world.

We at Shell will do our part. We will invest with discipline where we have differentiated capabilities. We aim to deliver the oil and gas that the world sorely needs today while also leveraging our unparalleled customer reach to develop the scalable and profitable low-carbon products that are urgently needed. Shell, under my leadership, will work to be the trusted partner of choice as the world’s energy systems transition for our customers, governments and investors. By doing so, we aim to deliver competitive returns and create significant shareholder value over the coming years. Now let’s look at our Q4 and full year results and financial framework. And for that, let me hand over to Sinead.

Sinead Gorman: Thank you, Wael. By continuing to provide the energy our customers need, we have again produced strong results. Our safety performance was impressive. We made good progress in both personal and process safety year-on-year. We also made good progress on carbon. By the end of 2022, we were more than halfway towards achieving our target reduction of 50% by 2030 for Scope 1 and 2 emissions. Moving to our financial performance. Our adjusted earnings for the fourth quarter were $9.8 billion, with strong contributions from our Integrated Gas business, and we generated $22.4 billion of cash flow from operations, including a positive inflow of $10.4 billion of working capital. These strong quarterly results helped us to achieve our highest ever full year results, with adjusted earnings of some $40 billion, more than double those of last year and around $17 billion higher than in 2014 when Brent prices were similar.

We delivered a full year cash flow from operations of over $68 billion. And our organic free cash flow was around $48 billion. In 2022, our financials were impacted by additional taxes of around $2.3 billion. Of this, around $1.5 billion related to the EU solidarity contributions in the Netherlands, Germany and Italy, with cash outflows expected in 2023 and 2024. For the U.K. Energy Profits Levy, they impact us some $900 million. And now on to our financial framework. Our strong performance over the year has allowed us to enhance our distributions to shareholders. Our total shareholder distributions for the year were around $26 billion in excess of 35% of our 2022 cash flow from operations. And today, we have announced a new $4 billion share buyback program, which we expect to complete on time of our Q1 results announcement.

As planned, we have also increased our dividend per share by 15% in the fourth quarter. Demonstrating discipline, our total cash capital expenditure for 2022 was $25 billion. And our outlook for 2023 is to maintain the $23 billion to $27 billion range, absorbing inflation. Our AA credit metrics ambition remains. We intend to continue to reduce our net debt as part of our robust financial framework. Finally, we will continue to target shareholder distributions of at least 20% to 30% of our cash flow from operations. And now I’ll hand back to Wael.

Wael Sawan: As you’ve heard, our results for 2022 were strong in what was a volatile external environment. So what do we expect to see for 2023? The balance between global energy supply and demand remains extremely tight. Small changes on either side can have a significant impact. So volatility and uncertainty will continue to be the watch words in 2023. And how will Shell respond to that? With confidence in the direction of our strategy and the strength of our businesses and with discipline and a focus on value. We’ve worked hard over the years to strengthen our portfolio. We have a clear strategy empowering progress. Our focus now is to further operationalize and profitably deliver this strategy. We will build from our strengths, where we will prioritize value over volume while reducing carbon emissions.

In Upstream, we will continue to proudly deliver energy that the world needs while driving strong results with our high-graded portfolio. In Integrated Gas, we will leverage and extend our world-leading LNG position. And in Marketing, we will build on the robust performance that we have seen in recent years. Performance will be top of mind. In every area of show, we aim to demonstrate progress at pace, not through words but through results, and we will continue to simplify our organization. One example of this is the more aligned and focused senior leadership structure that we announced earlier this week, with fewer rules and greater accountabilities, simplifying decision-making. By building on our strengths, focusing on performance and simplification, we intend to deliver compelling shareholder returns.

Shell is already a great company, and we are determined to be a great investment. And to give you more insights on how we plan to do this, join us in New York for our Capital Markets Day in June. Thank you.

Operator:

A – Wael Sawan: Thank you for joining us today. We hope that after watching the presentation, you’ve seen how we delivered strong results and how we intend to further operationalize our Powering Progress strategy. Today, Sinead and I will be answering your questions. And now please, could we have just 1 or 2 questions each, so everyone has the opportunity. And with that, could we have the first one, please, Dan?

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Q&A Session

Operator: The first question is from Oswald Clint at Bernstein.

Oswald Clint: Thank you very much, and good afternoon to both of you, and welcome, Wael, to the Q&A interrogation. First one on capital investment, please. Spend levels looking into the year in line with your guidance. That’s good. I think Sinead mentioned the guide is also absorbing inflation. So I was curious just how much and where you’re experiencing those hot spots at the moment. It doesn’t imply any activity has to be phased or pushed back. And I see within CapEx, Marketing steps up a bit this year. I assume that’s Nature Energy. But I’m just looking at Marketing, wondering that the earnings there are still a little bit below trend. And does Asia reopening here really start to help the earnings trend within that Marketing business?

That was the first question. Secondly, I’d love to ask about Integrated Gas. Wael, you mentioned volatility, uncertainty, your watch words for this year. We obviously had one hiccup last year around this business around hedging. So curious to know what the lessons learned were from 2022 and what’s the hedging strategy for this year, if there’s any changes needed in that approach.

Wael Sawan: Super. Oswald, thank you for that, and I appreciate being here for the interrogation. I guess I’ll get used to it. Let me start by maybe giving you, Sinead, the floor on the Marketing question and maybe also the Integrated Gas learnings. I can reflect a bit on inflation in a moment.

Sinead Gorman: Certainly. So indeed, thank you for that, Oswald. So in terms of Marketing, so taking a step back for the moment. So 46 sites and regional sites, #1 in lubes, if anyone can make substantial returns out of this, it is us. We are well positioned for it. In saying that, I agree. $400 million of earnings for this quarter was a little bit disappointing. But if you take a step back and look at why. So what we’re very comfortable with is seeing the fact that COVID has really not completely played out. So we’re still seeing the impact of that. And you’re right, you point out China as well. So we have great expectations with China opening up to be able to see that advance, and we’ve got green shoots already. And particularly in our lubes business, of course, we have a bit of a parachute effect.

The normal where the high cost of the inputs, it takes a while for that to be passed through as well. So those combinations, including with our differentiated offerings, we’re pretty confident in terms of how you will start to see some of our marketing results begin to improve. The second one was in relation to IG and the volatility around it. I’m just going to take a bit of an opportunity also to take that stuff back. We talked before about the fact that for IG, you really need — or Integrated Gas, you need to look at it over a series of quarters, not one specific quarter. We use price risk management. Our hedging is price risk management, and we use it to look at the exposures we have across the period, not specifically quarter by quarter by quarter.

Of course, that does mean that you see different things play out. You do see correlations becoming more or less effective. This quarter, you saw them being very effective because we didn’t see those dislocations between the EU and, in fact, JKM, et cetera. But those breakdowns are typically temporary, and that’s what you saw as it came through. So this quarter, hedging acting very much as intended, and that’s what we like.