Morning Note: Market News and an Update from Shell.
Market News
President Trump agreed to a two-week ceasefire, mediated by Pakistan. The news sent oil tumbling – Brent Crude is down 14% to $94 a barrel – and equity and bond markets higher. He said the pause is subject to the Strait of Hormuz reopening and that he’s also received a 10-point proposal from Iran. Benjamin Netanyahu said Israel supported Trump’s decision but that the ceasefire doesn’t include Lebanon.
Iran said safe passage through the strait would be “possible” for the two-week period, and Trump said the US will help with the traffic build-up in the waterway. Separately, the US president told AFP he believed China had helped get Iran to the negotiating table.
Bonds rallied, with the yield on the US 10-year Treasury falling to 4.25%. The minutes of the Federal Reserve (FOMC) meeting on March 17–18 are due to be released this evening. Bloomberg Economics said they may show policymakers leaning toward holding rates amid war uncertainty. Gold continued its recent recovery and currently trades above $4,800 an ounce.
Ahead of the ceasefire announcement, US equities were steady last night – S&P 500 (+0.1%); Nasdaq (+0.1%) – but are currently expected to open 3% higher this afternoon. In Asia, equities jumped: Nikkei 225 (+5.4%); Hang Seng (+3.0%); Shanghai Composite (+2.7%).
The FTSE 100 is currently 2.4% higher at 10,598, with the index rally held back by the heavyweight energy sector. Sterling trades at $1.3425 and €1.1480. The ceasefire brings relief to the Gilt market, with the 10-year yield down sharply by 19 basis points to 4.65%, a major relief for UK borrowing costs.
Source: Bloomberg
Company News
Shell has released an overview of its current expectations for the first quarter of 2026 which have clearly been impacted by the conflict in the Middle East. A mixed update highlights strong refining margins and trading profits, offset by weaker production and an increase in net debt. Full details including news on the dividend and share buybacks will be published with the results on 7 May. The shares have been strong over recent weeks as a result of the war, although last night’s agreement of a two-week ceasefire has sent the shares down 7% 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:
· 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. In 2025, the company generated $2.0bn of reductions, with the cumulative total standing at $5.1bn. Around 60% of the savings will come 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, with capital expenditure lowered to $20bn-$22bn p.a. for 2025-2028. 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 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 (this was 30%-40% previously), 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% 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.
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 Qatar Energy, in which Shell has a 30% stake. The company has confirmed no damage to train one and an initial assessment of around one year for full repair of train two.
LNG - Shell has 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 asset was not impacted during the attacks on 18 March.
Today’s statement highlights that in the three months to 31 March 2026:
· In the Integrated gas division, production is expected to be 880-920 kboe/d (vs 920-980 kboe/d guidance), reflecting the impact of the Middle East conflict on Qatari volumes. LNG liquefaction volumes are expected to be 7.6-8.0 MT, reflecting the ramp-up of LNG Canada, offset by Australia weather constraints and Qatar LNG outages. Trading & Optimisation is expected to be in line with the previous quarter.
· Upstream production is expected to be 1760-1860 kboe/d (vs. 1700-1900 kboe/d guidance).
· Marketing adjusted earnings are expected to be significantly higher than the previous quarter. Marketing sales volumes are expected to be 2,550-2,650 kb/d.
· Chemicals & Products - Refinery utilisation is expected to be 95%-99%, with Chemicals manufacturing plant utilisation of 81%-85%. Trading & Optimisation is expected to be significantly higher than the previous quarter.
· Renewables and Energy Solutions is expected to generate adjusted earnings between $0.2bn and $0.7bn. Trading & Optimisation is expected to be significantly higher than the previous quarter.
· The underlying indicative refining margin rose from $14/barrel to $17/barrel, while the indicative chemicals margin slipped from $140/tonne to $139/tonne.
The company expects a working capital outflow of between $10bn and $15bn, reflecting the impact of unprecedented volatility in commodity prices on inventory and receivables. Non-cash net-debt expected to be impacted by a $3bn-$4bn increase in variable components of long-term shipping leases in the current macro environment.
However, 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 2025, net debt stood at $45.7bn, with gearing at a comfortable 20.7%. Further details on the group’s Q1 gearing and capital expenditure (full-year target is $22bn-$25bn) will be provided with the results on 7 May.
As highlighted above, 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 $95) and the group is targetting 4% growth annually. The Q1 dividend will be declared with the results in May.
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 shares would create more value than large-scale M&A.
The latest $3.5bn share repurchase programme is expected to complete by the end of April and a new programme is likely to be announced with the Q1 results.
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.
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, 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
