Shell CEO Wael Sawan. — Bloomberg
IN 1970, the National Aeronautics and Space Administration (NASA) described the Apollo 13 mission as “successful failure” after safely returning the spacecraft to Earth following an explosion halfway to the Moon.
The same term can be applied to European oil giant Shell Plc’s nearly two-year-old strategy, which got an important refresher Tuesday.
Shell has done almost everything it promised in June 2023, when the original 10-quarter-long “sprint” was unveiled by newly arrived chief executive officer (CEO) Wael Sawan: cut costs, shed underperforming renewable energy units, refocus on fossil fuels (above all, liquefied natural gas), reduce debt and devote a growing share of the cash the business generates to buy back shares. Its quarterly dividend has increased, too.
Outperforming its rivals
Since Shell CEO Wael Sawan launched his “spring” strategy nearly two years ago, the stock has surged nearly 25%, ahead of its peers.
On most metrics, Shell has overdelivered. Kim Fustier, head of oil research at HSBC Holdings Plc, captured the mood among stakeholders with the title of her recent report: “More of the same, please.”
Sawan is listening. On Tuesday, he pledged to return 40% to 50% of cash flow to shareholders, up from the 30% to 40% committed two years ago, which itself was a vast improvement on the previous – and mediocre – 20% to 30% allocation.
That will come from significant cost cuts, both on day-to-day spending and new projects, particularly in renewables.
The potential weakness is future growth: While Shell glosses over the issue, some investors worry the company is underinvesting.
While the strategy’s success has earned Shell’s management bragging rights as a good steward of investors’ cash – with chief financial officer Sinead Gorman deserving much of the praise – it hasn’t yet achieved the holy grail of boosting Shell’s valuation to match those of its US rivals.
On a 2025 price-to-expected-earnings ratio, Shell trades at 9.9 times, compared with Chevron Corp and Exxon Mobil Corp at about 15.5 times. Sure, that’s better than two years ago, but the gap remains quite wide. Sawan pays attention to a particular metric: free cash-flow yield.
On that measure, Shell trades north of 14%, while Exxon trades just under 6.2% and Chevron is at 5%, according to data compiled by Bloomberg (the higher the yield, the lower the stock’s valuation).
Achieving valuation
Shell CEO keeps track of a key metric: cash flow yield.
On that measure, Shell trades at a significant discount to Exxon Mobil and Chevron.
Regardless of the measure, the gap remains wide, hence my description of the programme as a “successful failure.”
NASA didn’t land Apollo 13 on the Moon, but its safe return demonstrated the engineering ingenuity of the American lunar programme.
Likewise, while Sawan hasn’t yet delivered on valuation, everything else suggests that shareholders should remain supportive, particularly if the strategy is viewed as a work-in-progress rather than the best he can achieve.
It may be, though, that closing the valuation gap is impossible.
Exxon and Chevron are listed in New York, where investors are far more friendly to fossil fuels than in London.
Shell is at a disadvantage, running its “sprint” wearing the leather brogues favoured in the city rather than American racing sneakers.
Even so, Shell has narrowed the distance a bit. Since June 2023, its shares have risen more than 22%, while Exxon and Chevron are up 10% and 5%, respectively.
“We have outperformed our peers,” Sawan said in New York on Tuesday as he presented the refreshed strategy.
But he conceded that “we haven’t fundamentally re-rated”.
Sawan and Gorman are making the best of a bad situation by buying back stock at a valuation they believe is too low.
Since 2023, Shell has repurchased a fifth of its total equity. At the current pace, it’s poised to cancel an additional 40% by the end of the decade, a staggering statistic.
And while that should help to narrow the differential, its US peers are also buying their own stock.
Shell has made many mistakes over the past decade, chiefly the decision to slash its dividend by two-thirds during the pandemic.
That cut – the first since World War II – still haunts the company.
For some US investors, the move, which reduced the quarterly payout to 16 US cents per share from 47 US cents, was unforgivable.
After several quarters of dividend hikes since then, the payout of nearly 36 US cents per share remains well below the 2020 level.
If Shell sticks to its word, the dividend will recover its pre-pandemic level by 2031.
A year ago, Sawan told me that if by the end of 2025 the difference to his US rivals hadn’t closed, he would have to examine other options, including whether the London Stock Exchange offers the best primary listing for his company.
So far, the question answers itself: London remains inhospitable for an oil major.
As the sprint turns into more of a marathon, the next step may be more of a back-flip – relocating Shell’s listing to New York. — Bloomberg
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. The views expressed here are the writer’s own.
