Morning Note: Market News and an update from Shell.

Market News

Geopolitical risk remains elevated as the 9 July tariff deadline approaches. President Trump said letters would be delivered from midday Eastern time. Scott Bessent indicated some countries may be given extensions beyond the Wednesday deadline. Trump said any country aligning with BRICS’ “anti-American” policies will face an additional 10% tariff. StoneX said the move is “a warning shot” for EM nations that may consider alignment. Meanwhile, China is looking to impose some curbs on medical-device procurement for EU-based companies.

Hamas-Israel ceasefire talks ended inconclusively, Palestinian sources say. Brent Crude trades at $67.60 a barrel as OPEC+ ramps up output, agreeing in principle to a 550k b/d hike for August. Gold slipped back towards $3,300 an ounce.

In Asia this morning, equities drifted lower: Nikkei 225 (-0.6%); Hang Seng (-0.4%). After Friday’s holiday, the US market is currently expected to be up slightly at the open this afternoon.

The FTSE 100 is currently little changed at 8,802, while Sterling trades at $1.3610 and €1.1580. Rachel Reeves said that tax hikes in the autumn budget will probably be more challenging than last year’s £40bn package, the Times reported. Separately, the government talked down hopes of scrapping the two-child cap on parental benefits. 10-year Gilt yields remain elevated at 4.55%.

Source: Bloomberg

Company News

Shell has released a Q2 2025 update and an overview of the group’s current expectations for the quarter. Full details including news on the dividend and share buybacks will be published with the full-year results on 31 July. The company highlights that trading results will be much weaker than the previous quarter, while the Chemicals business has made a loss. In response, the shares have been marked down by 3% 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 is 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 and is splitting its power division following an extensive review of the business.

In March, the group hosted an Investor Day at which it set out several operational and financial targets including:

·       an increase in the structural cost reduction target from $2bn-$3bn by the end of 2025 (already achieved) to a cumulative $5bn-$7bn by the end of 2028, compared to 2022.

·       Invest for growth while maintaining capital discipline, with capital expenditure lowered to $20bn-$22bn p.a. for 2025-2028.

·       Grow free cash flow per share by more than 10% per year through to 2030 and generate a return of more than 10% across all business segments.

·       Enhance shareholder distributions from 30%-40% to 40%-50% of cash flow from operations (CFFO) through the cycle, continuing to prioritise share buybacks (as management believe the shares are undervalued), 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 top line production across the combined Upstream and Integrated Gas business by 1% per year 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.

Today’s statement highlights that in the three months to 30 June 2025:

·       In the Integrated gas division, production is expected to be 900-940 kboe/d, in the middle of the previous range, reflecting higher scheduled maintenance. Trading & Optimisation is expected to be significantly lower than in Q1.

·       Upstream production is expected to be 1,660-1,760 kboe/d, at the upper end of previous guidance, and reflects scheduled maintenance and the completed sale of SPDC in Nigeria.

·       Marketing adjusted earnings are expected to be higher than Q1, although sales volumes (2,600-3,100 kb/d) have been trimmed at the top of the range.

·       Chemicals & Products adjusted earnings are expected to be below break-even in Q2, with Trading & Optimisation significantly lower than Q1. Chemicals utilisation (68%-72%) was impacted by unplanned maintenance at Monaca.

·       Renewables and Energy Solutions is expected to generate a result between -$0.4bn and +$0.2bn. Trading & Optimisation is expected to be lower than Q1.

·       The underlying indicative refining margin, which strips out the Singapore divestment, rose from $6.2/bbl to $7.5/bbl. The indicative chemicals margin rose from $126/tonne to $143/tonne. 

The balance sheet is 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 the March quarter, net debt stood at $41.3bn, with gearing at a comfortable 18.7%. Further details on the group’s H1 gearing and capital expenditure (full-year target is $20bn-$22bn) will be provided with the results on 31 July.

Shell’s current policy is to return 40%-50% of cash flow from operations (CFFO) to shareholders through the cycle through a combination of dividends and share buybacks. The group’s dividend breakeven is around $40 per barrel (vs. Brent currently at $68) and the group is targetting 4% growth annually.

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 a recent statement in which it denied it was in takeover talks with BP. The latest $3.5bn programme is expected to complete by the end of July and a new programme is likely to be announced with the Q2 results. Total shareholder returns in 2025 are expected to amount to more than 10% of the current market cap.

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 using 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.

In common with all the oil majors, Shell is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic and geopolitical uncertainty. The company does this from a position of immense financial strength. The shares remain on an undemanding valuation (PE 10.5x), 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