Returning cash to shareholders this way will be proof that Shell isn’t spending it elsewhere, JP Morgan analyst Christyan Malek quipped in note.
Malek described Shell as being in pole position to monetise the demand and price recovery in crude markets as the global economy rebounds from the Covid-19 pandemic, and he said it will result in premium free cash flow for the transitioning oil supermajor.
Ahead of a July trading statement, the analyst forecast that Shell could buy-back US$500mln worth of its shares in the second half of 2021 followed by US$4.4bn of buybacks next year.
Shell is marked as JP Morgan’s ‘top pick’ in the European oil sector with the share price performance seen as contingent on the return of a buyback and dividend upside.
Malek, meanwhile, also looked at Shell’s scrutinised plans to transition and decarbonise its business over the coming years.
It comes as Shell is reeling from a Dutch court ruling earlier this month which ordered the company to amend its plans to reduce its fossil fuel emission to comply with the Paris Climate Agreement.
To do that, it would have to reduce its carbon emissions by 45% by 2030 from 2019 levels. The Anglo-Dutch giant had proposed its own plan that would have seen a 20% reduction by 2030, by 45% by 2035 and 100% by 2050 from 2016 levels, but this was rejected by the court.
In the JP note, Malek noted that the court ruling has put the financial risk associated to transition in sharp focus.
“There are numerous variables at play in framing a pathway to a 45% greenhouse gas reduction by 2030,” the analyst said.
Malek highlighted an improvement of emission intensity in the oil and gas unit, supported by technology, as one of the most meaningful factors along with the planned ‘greening’ of Shell’s sales mix.
He adds the caveat, however, that the degree of mix-rotation ultimately needed could be mitigated, if justified by demand, by faster adoption of carbon offset solutions.
Also in the note, JP Morgan described the recent US shale asset sale as a ‘silver bullet’ for its capital position. It highlighted too that the strengthened market conditions and strong cash flow materially de-risks the line-of-sight on deleveraging.