Morning Note: Market News and an Update from Shell.
Market News
Oil edged higher after Iran fired at least two missiles at an LNG carrier in the Strait of Hormuz. Another LNG tanker that was headed toward the strait U-turned in the Persian Gulf after that strike, ship-tracking data compiled by Bloomberg showed. Brent Crude trades at $72.80 a barrel.
Gold slipped to $4,130 an ounce as investors awaited the minutes of the Federal Reserve’s June meeting for fresh clues on the outlook for interest rates. The yield on the US 10-year Treasury moved up to 4.50%.
US equities posted gains last night – S&P 500 (+0.7%); Nasdaq (+1.1%) – although markets rolled over after-hours. In Asia this morning equities fell as renewed selling in technology stocks deepened concerns that the AI-driven rally may have run ahead of itself: Nikkei 225 (-1.9%); Hang Seng (-0.8%); Shanghai Composite (-1.6%); Kospi (-5.5%). Samsung Electronics slid 10% despite reporting a 19-fold jump in profit, as did SK Hynix after kicking off the marketing process for its US listing.
The FTSE 100 is currently 0.3% higher at 10,686, while Sterling trades at $1.3380 and €1.1710. Andy Burnham has decided not to split the Treasury due to concern the move would create economic disruption, the FT reported.
The yen was a touch stronger around 161.81 per dollar even as positioning data showed hedge funds turned the most negative on the Japanese currency since 2007.
Source: Bloomberg
Company News
Shell has released an overview of its current expectations for the second quarter of 2026, a period impacted by the conflict in the Middle East. The update highlights production volume that was slightly better than company expectations and significantly higher trading and optimisation profits. Full details including news on the dividend and share buybacks will be published with the results on 30 July. The shares are up 2% in early trading.
Shell is a global integrated energy company with expertise in the exploration, production, refining, and marketing of oil and natural gas, and the manufacturing and marketing of chemicals. The group is also allocating capital to low and zero carbon products and services including wind, solar, advanced biofuels, EV charging, hydrogen, and carbon capture & storage. According to Brand Finance Global 500, Shell is the most valuable brand in the industry, valued at around $50bn.
The business is divided into five segments:
· Upstream (i.e. E&P) explores for and extracts crude oil, natural gas and natural gas liquids. Shell has best-in-class deepwater assets complemented by resilient conventional assets in the Gulf of Mexico, Brazil, Nigeria, UK, Kazakhstan, Oman, Brunei, and Malaysia.
· Integrated Gas includes liquefied natural gas (LNG), conversion of natural gas into gas-to-liquids (GTL) fuels, and other products. Shell is the global leader in LNG (achieved through the 2016 acquisition of BG), a critical fuel for the energy transition, with a business that spans upstream, liquefaction, shipping, marketing, optimising, and trading.
· Chemicals & Products is made up of a focused set of assets – there are currently five energy and chemicals parks (i.e. integrated refining and chemicals sites) and seven chemicals-only sites.
· Marketing includes mobility, lubricants, and decarbonisation. In addition to the service stations with their EV charging footprint, Shell is the global number one lubricants supplier and operator of assets in renewable natural gas, sugar cane ethanol, and biofuels.
· Renewables & Energy Solutions includes Shell’s production and marketing of hydrogen, integrated power activities (solar and wind), carbon capture & storage, and nature-based projects. The assets are helping to reduce the carbon intensity of the group’s hydrocarbon product sites. The group is however stepping back from new offshore wind investments – it is returning a 3GW offshore wind lease back to the UK government – and is splitting its power division following an extensive review of the business.
The company has set out several operational and financial targets including:
· structural cost reduction of $5bn-$7bn by the end of 2028, compared to 2022. In 2025, the company generated $2.0bn of reductions, with the cumulative total standing at $5.1bn. Around 60% of the savings are coming from non-portfolio actions (i.e. not as a result of disposals). The company is actively exploring and harnessing AI to transform workflows and enhance business outcomes.
· Invest for growth while maintaining capital discipline: Managing a disciplined cash capex outlook of $24bn–$26bn for 2026—which includes $4bn allocated toward the ARC Resources acquisition (see below) and asset integration—while maintaining an unchanged baseline guidance of $20bn–$22bn p.a. for 2027–2028. The company continues to divest non-core assets and step back from projects with limited returns.
· Grow free cash flow per share by more than 10% p.a. through to 2030 (at $70 Brent) and generate a return of more than 10% across all business segments.
· Shareholder distributions of 40%-50% of cash flow from operations (CFFO) through the cycle, continuing to prioritise share buybacks, while maintaining a 4% p.a. progressive dividend policy.
To deliver more value with less emissions Shell will aim to:
Reinforce its leadership position in LNG by growing sales by 4%-5% per year through to 2030.
Grow production across the combined Upstream and Integrated Gas business by 1% p.a. to 2030, sustaining 1.4m barrels per day of liquids production to 2030 with increasingly lower carbon intensity.
Drive cash flow resilience and higher returns in the Downstream and Renewables & Energy Solutions businesses where around 20% of the company’s capital employed currently generates a negative return. This will be achieved through focused growth in the high-return Mobility and Lubricants businesses, directing up to 10% of capital employed by 2030 across lower carbon platforms, and through unlocking more value from the portfolio of Chemicals assets by exploring strategic and partnership opportunities in the US, and both high-grading and selective closures in Europe.
The company has set out the impact of the conflict in the Middle East on its activities:
Pearl GTL is the world’s largest gas-to-liquids plant developed by Shell and QatarEnergy, in which Shell has a 30% stake. The company currently expects no damage to Train One and an initial assessment of around one year for full repair of Train Two.
LNG - Shell has a 30% interest in QatarEnergy LNG N(4) equating to 2.4 MTPA of equity production. QatarEnergy shut in production on 2 March across all LNG facilities and subsequently declared force majeure. The complex was not impacted during the attacks on 18 March but has been largely idle since then because the closure of the Strait of Hormuz has trapped specialised LNG carriers in the Gulf.
Today’s statement highlights that in the three months to 30 June 2026:
· In the Integrated gas division, production is expected to fall from 909 kboe/d to 610-650 kboe/d, reflecting the impact of the Middle East conflict on Qatari volumes. However, the result is better than the company’s previous 580-640 kboe/d guidance. LNG liquefaction volumes are expected to be 7.8-7.8 MT. Trading & Optimisation is expected to be significantly higher than the previous quarter.
· Upstream production is expected to be 1750-1850 kboe/d, reflecting planned maintenance across the portfolio. The results is above previous guidance of 1620-1820 kboe/d.
· Marketing adjusted earnings are expected to be in line with the previous quarter. Marketing sales volumes are expected to be 2,550-2,650 kb/d.
· Chemicals & Products - Refinery utilisation is expected to be around 100%, with Chemicals manufacturing plant utilisation of 80%-84%, both better than expected. Trading & Optimisation is expected to be in line with the previous quarter.
· Renewables and Energy Solutions is expected to generate adjusted earnings between -$0.3bn and +$0.3bn.
· The underlying indicative refining margin rose from $17/barrel to $20/barrel, while the indicative chemicals margin jumped from $139/tonne to $240/tonne. Given market dislocations, realised refining and chemicals margins are lower than the calculated margins and have been adjusted accordingly.
The company expects a working capital inflow of between $1bn and $6bn, reflecting the impact of unprecedented volatility in commodity prices on inventory and receivables. This reverses some of the $11.2bn outflow seen in Q1.
The balance sheet is very strong, both in absolute terms and relative to the peer group, and the company targets AA credit metrics through the cycle. This provides resilience regardless of the industry or operational backdrop. At the end of Q1 2026, net debt stood at $52.6bn, with gearing at a comfortable 23.2%. Further details on the group’s Q2 gearing and capital expenditure will be provided with the results on 30 July.
In April, Shell announced the $16.4bn acquisition of Canadian energy company ARC Resources. The deal adds complementary oil and gas assets in a shift back toward stable, democratic jurisdictions for long-term supply. It helps address the group’s shrinking reserve life and is expected to be free cash flow accretive from 2027. With 75% of the transaction cost funded from the issue of new Shell shares, the company retains cash reserves for dividends and share buybacks.
As highlighted above, Shell’s current policy is to return 40%-50% of cash flow from operations (CFFO) to shareholders through the cycle via a combination of dividends and share buybacks. The group’s dividend breakeven is around $40 per barrel (vs. Brent currently at $72) and the group is targetting 4% growth annually. The Q2 dividend will be declared with the results on 30 July.
Even at $50 a barrel, share buybacks will be undertaken as a priority to debt reduction and capital investment as management believe the shares are undervalued. In fact, the company made this point again in the middle of last year when it denied it was in takeover talks with BP, highlighting that buying back its own stock would create more value than large-scale M&A.
In the near term, however, due to securities law requirements related to the ARC Resources acquisition, the latest $3.0bn buyback programme has been temporarily suspended between 12 June and 14 July. Any buybacks not completed during this period will be considered for inclusion in subsequent 2026 programmes. A new programme is likely to be announced with the Q2 results on 30 July.
We believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, and natural decline rates, are increasingly leading to constrained supply.
The shares remain on an undemanding valuation, both in absolute terms and relative to its US peers, which fails to discount the potential for free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation.
Source: Bloomberg
