Shell Posted Very Strong Quarterly Results but Cited Geopolitics and Further Deductions as Main Operating Risks

Shell (SHEL) reported Q1 results yesterday, reliably beating Street earnings estimates while generating very strong free cash flow. This was the strong quarter for Shell amid volatile geopolitical and macro conditions. The company’s adjusted net income came in at $9.1 billion, while the adjusted EBITDA rose to $19 billion. Shell secured $14.8 billion of cash flow from operations, which included $7.4 billion of working capital outflow due to rising commodity prices. Also, Shell generated $10.4 billion in free cash flow during the quarter, or close to 5% of its current market cap; excluding a $7.4 billion provision for net working capital, free cash flow would have been around $17.8 billion.

In terms of the itemized earnings, the Company posted $1.20 in adjusted EPS, versus the consensus estimate of $1.09. The company named several ongoing risks including a possibility of falling Q2 oil volumes, along with certain difficulties concerning Diamondback (FANG), Coterra (CTRA), Pioneer (PXD), Hess's (HES) onshore businesses.

However, the oil company is somewhat behind its schedule in terms of the $8.5 Billion share repurchase announced for 1H 2022, but plans to meet the target by the time of the Q2 release; the dividend was increased 4% to 25c representing around 3.5% yield.

In terms of its guidance, gas production is expected to increase 4% in Q2 though LNG volumes are expected to fall as Russia’s Sakhalin project was sold and removed from the projections (for Q1 2022, Shell took post-tax charges of around $3.9 billion in relation to Russian oil and gas activities), oil production is expected to fall almost 9% sequentially on maintenance, and refinery utilization is also expected to fall from 71% in Q1 to 69% in Q2.

Despite weak Q2 guidance, Shell's free cash flow and commitment to shareholders are likely to support shares ahead of what are expected to be very strong Q2 results for the sector as a whole because of high crude prices that are expected to gain momentum as Russia’s oil embargo is being discussed in Europe.