Shell shares: where next after the FTSE 100 oil major’s solid Q3 results?

Shell (LON: SHEL) shares surged to a record high in mid-October, as the FTSE 100 operator was buoyed by fears that the Israel-Hamas war could develop into a wider regional conflict involving Saudi Arabia and Iran. For context, Brent Crude — the international oil price benchmark — is trading for circa $86 per barrel, a historically elevated price despite falling, in line with Shell's share price, as fears have mildly abated.

On the other hand, the war is continuing to intensify. The Gazan-run health ministry now believes that more than 10,000 people have been killed in the territory since the war began a month ago, with Israel carrying out one of its heaviest bombardments of the Strip last night.

The Israeli military now considers it has effectively divided Gaza into two — and all major UN agencies have issued a rare joint statement calling for a humanitarian ceasefire arguing that ‘enough is enough.’

Shell shares: Q3 results

The FTSE 100 oil major reported earnings of $6.22 billion between July and September, up sharply compared to the previous quarter of $5 billion and just shy of the company-provided analyst expectations of $6.25 billion. However, these earnings were also down by over a third compared to the $9.45 billion of Q4 2022, when oil and gas prices surged in response to Russia’s invasion of Ukraine.

While BP was hit by weak gas trading results, Shell’s earnings were supported by ‘favourable’ LNG trading, which rose quarter-on-quarter. However, production at its integrated gas division fell by 9%, partially due to maintenance at its Prelude LNG production facility off the coast of Australia.

Shell plans to return another $3.5 billion to shareholders over the next three months through its share buyback programme, a rise from the $2.7 billion of the last quarter — bringing the total for 2023 to $23 billion. The dividend remains unchanged at $0.331 per share.

Oil price rises?

While oil prices have cooled slightly, geopolitical risks could remain elevated, especially with the Ukraine war continuing to rage. Indeed, the World Bank has warned that if war in the Middle East also escalates, crude oil could almost double to $150 per barrel.

For perspective, OPEC+ members, led by Russia and Saudi Arabia, decided on Sunday to continue with voluntary production cuts until the end of the year. Saudi is continuing to cut an additional 1 million barrels per day, and Russia an additional 300,000. Moscow has blamed Western ‘influence with market dynamics,’ referring to the cap on Russian oil that acts as part of sanctions on the country.

FTSE 100 long term strategy

While larger operators in the US — including Chevron and Exxon — have made headlines recently for acquiring smaller oilers within multi-billion-dollar deals, Shell CEO Wael Sawan has shied away from an acquisition strategy, preferring the traditional share buybacks.

In addition, the company has tightened the upper range of its capital spending target in 2023 to between $23 billion and $25 billion, from $23 billion to $26 billion previously. The CEO is also changing strategic direction, with a focus on higher-margin projects and growing its natural gas production.

To achieve this within the confines of its capex target, the company is cutting at least 15% of employees at its low-carbon division and scaling back the hydrogen business. For context, Shell noted that most of its renewables business remained loss-making in Q3. However, the cutbacks have sparked some public concern from employees.

Overall, the company remains close to a record high, and yet still boasts a price-to-equity ratio of less than 8. Accordingly, solid results could see Shell shares could continue to rise through the FTSE 100.

But remember, past performance is not an indicator of future returns.