Morning Note: Market news and updates from Shell and Imperial Brands.

Market News

Donald Trump opened the door to a possible end to the shutdown impasse by saying he’d negotiate with Democrats on healthcare subsidies, but later signalled he’d only talk once the government reopened. The Senate again rejected a stopgap bill. Trump said 25% tariffs on imports of medium- and heavy-duty trucks would begin on 1 November.

Political uncertainty remains in France – Emmanuel Macron gave outgoing PM Sebastien Lecornu until Wednesday evening to negotiate with France’s parties in a last-ditch effort to stem the country’s political crisis.

US equities rose last night – S&P 500 (+0.4%); Nasdaq (+0.7%) – as a rally in chipmakers sent stocks to all-time highs, driven by Advanced Micro Devices’ (+25%) deal with OpenAI added fuel to the AI frenzy.

The dollar rose as investors warmed to the idea the “sell America” trade seen earlier in the spring was a head-fake. Bonds fell with long-term Treasuries underperforming, as the yield on 10-year Treasuries advanced four basis points to 4.16% in sympathy with other global bond markets.

Gold drifted back from a new record high to trade at $3,955. Goldman said the metal may reach $4,900 by the end of 2026 but Ken Griffin said it’s “really concerning” that investors are increasingly viewing the commodity as a safer asset than the dollar. The PBOC, China’s central bank, extended its buying streak to an 11th straight month.

The FTSE 100 is little changed at 9,483. Shawbrook is said to target raising about £400m in its London IPO, seeking to value the company at £2bn. Sterling trades at $1.3440 and €1.1505. UK annual house price growth was its slowest since April 2024 in September.

Source: Bloomberg

Company News

Shell has released an overview of its current expectations for the third quarter which highlights that the trading business has been strong and LNG production ahead of forecast. Full details including news on the dividend and share buybacks will be published with the results on 30 October. In response, the shares have been marked by 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 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.

Last 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. In the first half of 2025, the company generated $0.8bn of reductions, with the cumulative total standing at $3.9bn. Around 60% of the saving will come from non-portfolio actions (i.e. not as a result of disposals).

·       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% 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 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 September 2025:

·       In the Integrated gas division, production is expected to be 910-950 kboe/d. The LNG production forecast has been raised from 6.7mt–7.3mt to 7.0mt–7.4mt. Trading & Optimisation is expected to be significantly higher than the previous quarter.

·       Upstream production is expected to be 1,790-1,890 kboe/d, at the upper end of the previous guidance range.

·       Marketing adjusted earnings are expected to be higher than Q2, although sales volumes will be lower (2,650-3,050 kb/d). Non-cash post tax impairments and provisions of $0.6bn are expected due to the Rotterdam HEFA project cancellation.

·       Chemicals & Products adjusted earnings are expected to see a loss in Q3, with Trading & Optimisation higher than the previous quarter. Chemicals utilisation is expected to increase to 79%-83%.

·       Renewables and Energy Solutions is expected to generate a result between -$0.2bn and +$0.4bn.

·       The underlying indicative refining margin rose from $8.9/bbl to $11.6/bbl, while the indicative chemicals margin slipped from $166/tonne to $160/tonne. 

Shell’s 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 June quarter, net debt stood at $43.2bn, with gearing at a comfortable 19%. An increase in gearing of 0.4% is expected in Q3 related to new pension legislation in the Netherlands. Further details on the group’s Q3 gearing and capital expenditure (full-year target is $20bn-$22bn) will be provided with the results on 30 October.

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 $65) and the group is targetting 4% growth annually. The Q3 dividend will be declared with the results at the end of October.

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 earlier in the year in a statement in which 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 programme is expected to complete by the end of October and a new programme is likely to be announced with the Q3 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 11x), 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

Imperial Brands has released a trading update covering the financial year to 30 September 2025. The company met its expectations for the year supported by tobacco pricing and continued momentum across next generation products. The group has also announced another share buyback programme, this time £1.45bn – including the dividend, this equates to a return of 11% of the current market cap. The shares have been a good medium-term performer and remain attractive given the level of prospective shareholder returns. In response to today’s update, they are up 3%.

Imperial Brands manufactures and sells cigarettes, fine cut tobacco, smokeless tobacco, cigars, and next generation products. The main brands include Winston, Davidoff, L&B, West, Gauloises, JPS, Rizla, and blu.

Last March, the company unveiled its new 2030 strategy which builds on the strong foundations of the previous five-year plan which ran until September 2025. The strategy has two focused objectives:

-          Drive sustainable value in combustibles where the company will continue to focus on its five largest markets – the US, Germany, the UK, Australia, and Spain – which represent 70% of adjusted tobacco operating profit. Within these markets, Imperial has identified specific areas for further investment by category, brand, and sales channel. The objective is to continue to maintain aggregate market share across the five markets in aggregate, with the aim of driving sustainable growth and cash delivery. By applying this same performance-driven, consumer-led approach to the wider portfolio of smaller tobacco markets, Imperial expects them to make a greater contribution to overall performance over the next five years.

-          Build scale in next generation products (NGP) – Imperial has a strong platform for a fast growing and agile NGP business with credible brands in all three categories (vaping, heated tobacco, and modern oral) and differentiated products available in all material markets where the group has distribution routes. Imperial will retain disciplined investment and market entry criteria as it builds a meaningful business with additional growth opportunities and strong profit and cash performance. For now, however, the business remains loss-making with no precise guidance on time to breakeven.

To support the delivery of its strategy, the company has identified further opportunities to create a simpler, leaner, and more agile organisation. These initiatives are expected to generate annualised savings of £320m by 2030, the majority of which will be reinvested to support growth. The anticipated cash cost of these initiatives is £600m, £500m of which will fall in FY2027 and FY2028. Last week, the company announced plans to cease production at its Langenhagen factory in Germany, either via a sale of the site to a third party or closure of the factory. Costs expected in relation to this process are within the group’s current guidance.

The new strategy will support the company’s medium-term guidance for growth on a constant currency basis: low-single digit tobacco net revenue growth and double-digit NGP net revenue growth; adjusted operating profit growth of around 3%-5%; adjusted EPS growth at a high-single digit rate, supported by a continued reduction in share count through the share buyback; and free cash flow generation of between £2.2bn and £3.0bn per annum.

At the start of October, Lukas Paravicini (ex CFO) became CEO following the retirement of Stefan Bomhard for personal reasons. The new CFO is Murray McGowan.

Back to this morning’s update. In the year to 30 September 2025, at constant currency, the company is on track to deliver low single-digit tobacco and NGP net revenue growth, underpinned by strong combustible pricing and further double-digit growth in the NGP business. Market share gains in the US, Germany, and Australia, are expected to broadly offset declines in Spain and the UK, implying the group will just miss its aim to generate an aggregate market share increase in its top five markets.

Strong pricing more than offset volume declines, which have eased across the majority of the group’s footprint, although there has been some volatility in certain markets. 

NGP net revenue growth for the full year, at constant currency, is expected to be around the mid-point of a 12%-14% range, as the company builds scale across its existing footprint.

Group adjusted operating profit growth is expected to be similar to last year, in line with guidance. NGP losses are expected to be broadly flat year on year.

Adjusted EPS growth in the high single-digits at constant currency is expected, supported by the ongoing share buyback programme (see below), partly offset by higher adjusted finance and tax costs as well as increased minority interests, given strong growth in some of the group’s African markets.

The capital allocation framework includes investment in organic growth initiatives in combustibles and NGP, while continuing to evaluate opportunities for small bolt-on acquisitions, which will be focused on enhancing NGP capabilities. The capital intensity of the business is low with modest annual capex needs of £300m-£350m.

Free cash conversion remains strong and the group expects full-year leverage to continue to be at the lower end of its 2.0 to 2.5 range for adjusted net debt to EBITDA.

The company has a progressive dividend policy to provide a reliable, consistent cash return to shareholders. Dividends per share will grow annually considering underlying business performance. The group has today reiterated its commitment to underlying dividend increase for FY2025 of 4.5% to 160.32p (5.3% yield).

Surplus capital is being returned to shareholders via an ‘evergreen’ (i.e. ongoing) share buyback over the five years to FY2030.  The board will determine the quantum of future buybacks on an annual basis, in line with current practice, but has said they will be ‘material’. The current £1.25bn programme is expected to complete no later than 29 October 2025. Taking dividends and the buyback together, the company expects underlying capital returns to shareholders in FY2025 will amount to c. £2.8bn, more than 12% of its current market capitalisation. That takes the total capital return for the five years to September 2025 to c. £10bn, representing 67% of its market capitalisation in January 2021 when the strategy was launched.

This morning, the company has announced a new £1.45bn share buyback for FY2026, which is expected to complete no later than 28 October 2026. Taking dividends and buyback together, the company expects its capital return to shareholders will exceed £2.7bn in the coming fiscal year, representing around 11% of the current market capitalisation.

The company has yet to provide guidance for the financial year to 30 September 2026 – we would expect this at the time of the half-year results on 18 November.

Source: Bloomberg