Shell’s Shrinking Green Pledge Risks Backfiring

(Reuters Breakingviews) – Shell  CEO Wael Sawan has upped the UK group’s quarterly buyback plan while cutting back on unprofitable low-carbon activities. His pivot back into fossil fuels has shielded the $217 billion company from the wind energy troubles now ensnaring European peer BP and renewables giant Orsted. But the strategy can work only as long as volatile energy prices stay high.

Shell’s $6.2 billion third-quarter adjusted net profit shrunk by a third from a year earlier but came in line with analysts’ expectations. Meanwhile Sawan is spending less, especially on greener assets. In the first nine months of this year, Shell invested about $1.7 billion into wind and solar, hydrogen and carbon capture and storage, down 30% from the same period last year, Breakingviews calculations based on Shell filings show. That puts Shell on track to hit the lower end of its $2 billion to $4 billion guidance for such investments in 2023. Outside that, Shell spent about $2.3 billion in what it calls “Marketing” that includes biofuels and EV charging, down from the $2.8 billion in the same period of 2022. That doesn’t include a $2 billion purchase Shell completed in February to buy biogas producer Nature Energy.

The spending caution has created more space to buy back $3.5 billion of shares in the next three months, above the company’s $2.5 billion guidance. That should keep investors happy. So far this year, the total return for Shell’s shareholders has hit 17%, above rivals like BP and TotalEnergies. Returning more capital may help Sawan further narrow a valuation gap with American rivals like Exxon Mobil and Chevron.

Investors may also regard Sawan’s decision to retreat from troubled, loss-making renewables such as wind as prescient following big writedowns at BP and Orsted this week. But questions remain on whether his approach will work out once the clean transition gathers pace. In addition to laying off 200 people, or 15% of the workforce at Shell’s Low Carbon Solutions team next year, which does not include the renewable power business, Sawan is also planning to pare back in hydrogen light mobility operations, which develop technologies for light passenger vehicles, and has refrained from splashing on more promising areas like biofuels and carbon capture. Its $67 million quarterly loss in the Renewables and Energy Solutions division contrasts with the performance of French peer TotalEnergies’s low-carbon activities, which reported a record $506 million profit in the third quarter, up 114% from the same period last year.

Robust oil and gas prices are currently helping Shell. Brent crude prices averaged around $85 a barrel in the third quarter compared to $75 in the previous one. But energy is traditionally a volatile segment. If prices start to retreat, Shell investors may be left without an additional revenue stream. Sawan’s fossil fuels sweet spot looks good now. The risk is that it may not last.

Shell on Nov. 2 reported third-quarter adjusted net income of $6.2 billion, 34% down from a year before and in line with analysts’ expectations.

The $217 billion British energy giant also announced it would buy back shares worth $3.5 billion over the next three months, 40% above its guidance.

Shell plans to cut around 15% of the workforce at its low-carbon division next year and scale back its hydrogen business, the company told Reuters on Oct. 25.

Shell’s shares were up 2.2% at 2717 pence as of 0940 GMT.