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BP’s Bernard Looney put it more succinctly last year when he described the company as “a cash machine at these types of prices”, but Shell’s chief executive, Ben van Beurden, was coming from the same place as he reflected on almost £10bn of profits in a single quarter. “Of course these are very significant [profit] margins, but these margins are not our doing. They are the doing of how global markets play out,” he said.
He’s right about market conditions obviously. A barrel of Brent fetched well over $100 during the quarter, gas prices have gone to the moon; refining capacity is severely tight; and the entire industry underinvested during the first year of the pandemic, creating near-perfect conditions for a spike in prices when Russia invaded Ukraine.
But the maddening bit of Van Beurden’s breezy account is what he says in the next breath – the claim to be “working very hard to bring on new supplies” and to be investing furiously in “the energy system of the future”, meaning a lower carbon one. Shell, it is obvious, could afford to allocate far greater sums to investment, including renewables, but is choosing not to do so.
Current plans involve numbers that look large at first sight: $23bn to $27bn of capital expenditure this year, with a one-third skew towards renewables; and, for a UK audience, an average of £3bn-a-year to be invested here until the end of the decade. The point, though, is that those spending plans flow from a model that was drawn up 18 months ago before a windfall fell into Shell’s lap.
The “financial framework” imagines that every last dollar, beyond what’s ear-marked for investment, debt-servicing and regular dividends, goes to shareholders via share buy-backs. The size of these buy-backs is now extraordinary: $6bn for the current quarter, after $8.5bn in the first half. Add regular dividends, and Shell, a company worth £150bn, could return 15% of its market capitalisation to investors in 2022.
Shareholders and pension funds must have prizes, of course, but allocating no extra capital towards low-carbon projects is indefensible given the resources suddenly at Shell’s disposal. The company calls its approach “disciplined”, but it is behaving as if nothing has changed, or that it has run out of ideas. The story here is not simply one of markets “playing out”. It is also about the pace at which the company funds transition. Shell could transition faster – much faster.
Reading the room
By contrast, it is impossible to get angry about Centrica’s modest dividend for shareholders, even if it attracts more political flak. The owner of British Gas hasn’t paid a dividend for two years and a half-year distribution of £59m, or a penny a share, does not come at the expense of useful investment.
The most important looming investment decision relates to the re-opening of the Rough offshore storage facility in the North Sea, which, everybody now agrees, should never have been closed. For the sake of energy security (gas and, in future, hydrogen), it is vital the company and the UK government find a contract-for-difference arrangement.
The contribution of British Gas, the retail supply business, to half-year operating profits of £1.3bn wasn’t much – £98m, equivalent to a profit margin of 2%. Instead, the money was mostly made in North Sea production and via higher prices for nuclear-generated electricity (Centrica owns a 20% stake in the UK’s fleet). Since those assets are captured by the windfall tax, outrage about the dividends should fade.
Distribution to shareholders are allowed, after all – indeed are vital to keep investment flowing. It’s the level, and the other aspects of a company’s performance, that matter. Shell looks grasping. Centrica, now that it’s stopped grumbling about the windfall tax and is talking about decarbonising projects, looks better attuned to the mood outside.
Never-boring Barclays
Many chief executives in the recent past have tried to make Barclays boring. CS Venkatakrishnan, who was supposed to mark a break from the era of regulatory thrills and spills under Jes Staley (and others before him), isn’t there yet.
The lowlight of the half-year numbers was a £581m net charge for a cock-up that saw the bank sell more structured notes – securities giving exposure to baskets of stocks, interest rates and so on – than it was authorised to flog.
The “litigation and conduct” fun continued via a $200m whack from US regulators’ clamp-down on traders sending work messages via WhatsApp, and a penalty for past larks with timeshare loans. The actual operational performance was fine, but you can see why the shares continue to be lowly rated. You never know what’s coming next with Barclays.
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