Analyst Note| Allen Good, CFA |
Shell turned in a strong second-quarter results on the back of strengthening commodity prices. Adjusted earnings increased to $5.5 billion from $638 million the year before. Meanwhile, operating cash flow excluding a working capital headwind surged to $14.2 billion from $6.5 billion the year before, lifting organic free cash flow, excluding asset sale proceeds of $1.2 billion, to $8.4 billion from negative $254 million last year. The strong results for the last two quarters have reduced net debt to $65.7 billion. Although not quite at the prior target of $65 billion, Shell has moved to the next phase of its shareholder distribution program that calls for returning 20%-30% of operating cash flow while maintaining AA credit rating metrics, which means further net debt reduction in the coming quarters. As such, Shell has rebased the dividend to $0.24/share from $0.1735 previously, while keeping its 4% annual growth target in place. It will also repurchase $2 billion worth of shares by year-end. The step up in shareholder returns is important as Shell’s yield of 3.5% trails peers that did not cut the dividend last year. The new dividend implies a more competitive forward yield of 4.9%. This does not include the repurchases, but peers are likely to introduce repurchase programs as well given higher oil prices.