Morning Note: Market News and Updates from Shell and Procter & Gamble.
Market News
Investors were left unimpressed by Kevin Warsh’s bare-bones communication style after the Fed’s decision to keep rates on hold. They dumped 30-year Treasury bonds, sending yields to a 19-year high, on concerns he isn’t fully committed to taming inflation. There were three dissenting votes for a rate hike highlighted growing internal hawkish pressure. Traders pared bets for a September rate hike. Inflation data is due out later today. Gold trades at $4,050 an ounce, while the yield on the US 10-year Treasury is 4.69%.
The US launched new strikes against Iran, hitting dozens of military targets. It described the attack as a ‘heavy wave’ but gave no indication if it targeted key bridges or other civilian infrastructure that would signal a major escalation. Following yesterday’s rise, Brent crude drifted back slightly to $92 a barrel. Qatar managed to send its first LNG shipment through the Strait of Hormuz in more than three weeks.
US equities fell last night – S&P 500 (-1.5%); Nasdaq (-1.7%) – although they recovered somewhat in the after-market. Microsoft jumped 8% post market on the strongest cloud growth in four years, while Meta dipped 7% on a disappointing revenue outlook. Attention now turns to Apple, in what may be Tim Cook’s final full quarter as CEO, as well as Amazon.
In Asia this morning, equities were mixed: Nikkei 225 (+0.7%); Hang Seng (+0.1%); Shanghai Composite (-0.8%); Kospi (-1.2%). Japan’s 10-year bond yield rose after a two-year auction met weaker demand.
The FTSE 100 is currently little changed at 10,911. The Bank of England is expected to leave borrowing costs unchanged today. Sterling trades at $1.3345 and €1.1660, while the 10-year Gilt yield has moved back above 5%.
Source: Bloomberg
Company News
Shell has released second-quarter results which were well above market expectations and more than double its profit from the same time last year. The results were impacted by the conflict in the Middle East and significantly higher trading and optimisation profits. The company has raised its dividend by 9% and announced another $3bn share buyback programme. 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.
Now, back to the results. In the three months to 30 June 2026, operational performance enabled very strong profits during another quarter of severe disruption in global energy markets. Adjusted earnings rose by 131% to $9.8bn, well above the market forecast of $8.9bn. The results reflect strong operational performance across the businesses despite Middle East outages, with record upstream production in Brazil and record refinery utilisation.
Compared to the previous quarter, a strong result in itself, earnings increased by 42%, reflecting higher realised prices, higher LNG trading and optimisation, favourable tax movements, higher Chemicals margins and higher crude and oil products trading and optimisation. These were partly offset by lower volumes, mainly due to the impact of the Middle East conflict on Qatari volumes, and lower Lubricants margins.
Oil and gas production fell by 8.4% to 2.455m barrels a day. The company has warned that production in the current quarter will be impacted by higher maintenance across the portfolio. The underlying indicative refining margin rose from $17/barrel to $20/barrel, while the indicative chemicals margin jumped from $139/tonne to $240/tonne.
By division, Q2 adjusted earnings were Upstream (+101% year on year), Integrated Gas (+55%), Marketing (+11%), Chemicals & Products (up from $118m to $2.9bn), while Renewables made a $79m gain.
The company benefitted from a working capital inflow of $3.4bn, 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. In Q2, the group spent $4.2bn on capital expenditure, versus underlying guidance of $20bn-$22bn for the full-year. The group generated $17.5bn of free cash flow to leave net debt at $41.8bn, with gearing at a comfortable 18.7%.
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. $90 currently) and the group is targetting 4% growth annually. 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.
With these results, a Q2 dividend of 39.06c a share was declared, 9.1% above the same quarter last year, to give a total yield expectation for 2026 of 4%.
Due to securities law requirements related to the ARC Resources acquisition, the $3.0bn buyback programme announced with the Q1 results was temporarily suspended between 12 June and 14 July.
With today’s results, a new $3.0bn programme has been announced to be completed by the end of October 2026. In addition, the company will buy back the $1.232bn of shares that were not repurchased due to the ARC-related suspension.
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
Yesterday lunchtime Procter & Gamble released results for the three months to 30 June 2026, the final quarter of its financial year. Although sales were held back by weak consumer spending in core categories, earnings were slightly above the market forecast. Guidance for FY2027 was a little underwhelming, held back by uneven demand in categories such as grooming and oral care amid geopolitical and economic uncertainties. In response, the shares were marked down 2%.
P&G is a global consumer goods company with annual sales of $87bn across a broad range of iconic brands including Gillette, Crest, Ariel, Oral-B, and Pampers. The focus is on daily use categories. The group generates around half of its sales in North America, a fifth in Europe, and the remainder in emerging markets.
The company has been exiting underperforming businesses over the past few years, the latest being laundry bars in India and the Philippines, as it adjusts its portfolio to shifting consumer spending trends in overseas markets. Last June, the company announced a portfolio and productivity plan to focus its portfolio and organisation to improve its cost structure and competitiveness. The move will lead to a reduction of about 7,000 non-manufacturing roles over the course of two years.
In the financial year to end June 2026, the company faced a very challenging geopolitical and economic environment. Sales grew by 3% to $87bn. Organic growth, which excludes the impact of acquisitions, disposals, and negative currency movements, was up 1% in the full year, at the lower end of the group’s 0%-4% guidance range. Higher pricing contributed one percentage point of growth to organic sales. Shipment volumes and mix were flat.
In the three months to 30 June, net sales were up 2% at $21.2bn, a touch below the market forecast of $21.4bn. In the final quarter, sales were flat in organic terms. The company highlights that lower-income households have cut back on spending even on essentials, as they deal with high prices, a tepid employment market, and broader geopolitical uncertainty.
Nine out of 10 product categories grew or maintained organic sales in the year, while 26 of the group’s top 50 category/country combinations held or grew share.
The group operates across five divisions:
· Fabric & Home Care (36% of full-year sales) was flat in the three months to end June, as growth in fabric care was offset by a decline in home care.
· Baby, Feminine & Family Care (24% of sales) fell by 2%, driven by a decline in feminine care.
· Beauty (19% of sales) rose 4%, driven by hair care and personal care.
· Health Care (13% of sales) was down 1% as growth in personal health care was offset by a decline in oral care.
· Grooming (8% of sales) was flat as the impact of innovation-based pricing were offset by the impacts of a volume decline.
On a currency-neutral basis, the core gross margin was unchanged in the final quarter at 49.1%. Productivity savings (160 basis points), net tariff benefit from recognized recoveries and higher costs (40bps), other miscellaneous items (20bps) and pricing benefit (10bps), were offset by unfavourable product mix (-120bps), product/package reinvestments (-70bps), higher commodity costs (-40bps). The full year gross margin was down 30bps to 50.8%.
The core operating margin fell 130bps to 19.5%, leaving the full-year margin down 60 bps to 23.7%. Core EPS fell by 3% at constant currency in the final quarter to $1.43, slightly better than the market forecast of $1.41. Full-year Core EPS grew by 1% to $6.89, at the lower end of the guidance range of flat to +4% to $6.83-$7.09.
During the full year, adjusted free cash flow was $15.8bn and adjusted free cash flow productivity was 100%, above the 85%-90% target. The group ended the period with net debt of $24.2bn and returned over $15bn of cash to shareholders through dividends ($10.2bn) and share repurchases ($5.0bn), in line with guidance. The group has increased its dividend for 70 years in a row and, earlier in the month, the quarterly payout was raised by 3% to $1.0885. On a full-year basis, this equates to a yield of 3%.
The company has introduced guidance for the financial year to June 2027. Although progress is expected on each of its key financial measures, the targets were below market expectations. Organic sales growth is expected to be 1% to 3%, including a headwind of 30 to 50 basis points from brand, product form and go-to-market discontinuations. Core EPS is expected to grow in the range of flat to +3% to $6.89-$7.09. The company expects free cash flow productivity of 85%-90% and to pay around $10bn in dividends and to repurchase $5bn of shares in the year.
Source: Bloomberg
