Shell is having a cash flow crisis

No one is as ashamed of wealth as the oil and gas industry. In the midst of a cost-of-living crisis, Shell has the opposite problem: a UK-listed energy group record annual net profit last year was close to $40 billion, double what it was in 2021.

That translated into $48 billion worth of organic free cash flow, up nearly 80% after oil and gas prices skyrocketed following Russia’s invasion of Ukraine. Questions about how Shell and its peers are deploying that volume are increasingly not easy to answer.

The first problem is taxes. Last year, as Shell praised After a “critical year” with results, then chief executive Ben van Beurden initially dismissed calls from politicians for a surprise tax on corporate profits. Oil and Gas. At the time, the government of the time was also against the idea, before folding under the principle of surprise taxation, and then all together falling apart.

There will be more political action to come. Labor is calling for a tougher surprise tax, dating from the start of the price hike and at a higher rate. Shell is paying more taxes thanks to surprise levies in the UK and Europe. But the $100 million cash tax paid in the UK, which is expected to rise to $500 million this year, won’t silence critics.

The more conundrum for management is how Shell and others are choosing to use their spoils. Shell returned $26 billion to its investors last year, of which more than $18 billion came from its own stock purchases. Yes, that was boosted by the sale of the Permian basin business in 2021. But the company on Thursday announced plans to acquire $4 billion in the first quarter of this year alone. Buybacks are likely to become the next political flashpoint, with consultancy IPPR calling on the UK to follow the lead of the US and Canada in taxing share buybacks.

Shell and its colleagues face a near-impossible task of continuing to deliver an increasingly hated product the world still desperately needs, investing in new technologies that deliver a future. future for the business and promising enough for skeptical investors to keep them in the future. drive.

But it’s awkward that Shell returned to its shareholders last year more than it invested in any future energy, clean or dirty: their total cost of capital was around 24, $8 billion, of which only $3.5 billion was spent on renewable energy and energy solutions. business, up 47% over the previous year.

The company says that doesn’t accurately reflect spending on low- or zero-carbon technologies, such as marketing or chemical units: it indicates that a third of operating and capital spending combined focus on low carbon products or services . It is expected to leave its renewable energy investment unchanged this year, and its overall guidance on capital spending between $23 billion and $27 billion unchanged.

The impression is of a company with a lot of cash and few easy ways to spend it. It cannot continue to repay the debt forever. Citi notes that oil and gas companies need strong balance sheets to weather increasingly volatile cycles, but Shell’s net debt has nearly halved since the end of 2019.

Investors, basically, don’t want to invest more. New CEO Wael Sawan talks about the need for a “balanced energy transition,” the code for “we still have to spend on oil and gas.” But history shows that with oil prices at this level “anyone punishes a huge investment budget. . . regret,” says Bernstein’s Oswald Clint.

Sawan also argues that the world (including governments, customers and energy companies) is moving too slowly in the energy transition, which upsets unchanged investment plans. There maybe a change of strategy, or more explicit goals, on the first investor day in May. But it’s no secret that major energy corporations have struggled to find green investments that offer attractive returns.

Not too long ago, the concern was that the big oil companies didn’t have the cash flow to invest in fossil fuels, develop green businesses, and deliver the required returns to shareholders. Now the opposite is true. It’s not much clearer how they want to handle it.

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