Morning Note: Market news and updates from Shell and Unilever.

Market News

The US dollar hovered around a two-month high, after the Federal Reserve held interest rates steady at 4.25%–4.5%, as expected. Chair Powell reiterated that it was too early to consider rate cuts and offered little clarity on the timing of any potential easing. Following his remarks, markets dialled back expectations for rate cuts this year, now pricing in just 35 basis points of easing by December. Two Fed governors dissented in favour of a rate cut — the first double dissent in over 30 years. 10-year Treasury yields pushed up to 4.35%. Gold trades at $3,305 an ounce, having recovered some of the loss suffered yesterday following the rate announcement.

President Trump reached a trade deal with South Korea on a 15% tariff rate and $350bn in US investments. He delayed a 50% levy on Brazil exports by seven days while exempting products including and civil aircraft.

US equities were little changed last night – S&P 500 (-0.1%); Nasdaq (+0.2%). However, the Nasdaq 100 futures surged following by strong earnings reports from Meta and Microsoft. Apple, Apple, and Mastercard report later.

In Asia this morning, markets were mixed: Nikkei 225 (+1.0%); Hang Seng (-1.5%); Shanghai Composite (-1.2%). The yen gained after the BOJ raised its inflation forecast. The FTSE 100 is currently 0.5% higher at 9,182, while Sterling trades at $1.3260 and €1.1580.

Copper fluctuated on the LME and slumped on the Comex after Donald Trump unexpectedly exempted refined metal from US import tariffs. Brent Crude trades at $72.50 a barrel, hovering near a six-week high amid mounting concerns over tighter global supply.

China said it summoned Nvidia over security risks of its H20 semiconductors, saying the chips were exposed to serious security issues.

Source: Bloomberg

Company News

Shell has today released second-quarter results which were above market expectations. The group has raised its dividend by 4% and announced another $3.5bn buyback. In response, the shares have been marked up 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. In the first half of 2025, the company generated $0.8bn of reductions, with the cumulative total standing at $3.9bn.

·       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 of 40%-50% of cash flow from operations (CFFO) through the cycle (raised from 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.

Now, back to today’s results. In the three months to 30 June 2025, although adjusted earnings fell by 32% to $4,264m, the results was well above the market forecast of $3,740m. Compared to the previous quarter, earnings fell by 24%, reflecting lower trading and optimisation margins and lower realised liquids and gas prices, partly offset by higher Marketing margins and lower operating expenses.

Oil and gas production fell by 5% to 2.68m barrels a day. Underlying operating expenses fell by 6% in the first half. The underlying indicative refining margin rose from $6.2/barrel to $7.5/barrel. The indicative chemicals margin rose from $126/tonne to $143/tonne. 

By division, compared to the previous quarter, Upstream adjusted earnings fell by 26%, while Integrated Gas fell 30%, Marketing rose 33%, Chemicals & Products made a small profit, and Renewables a small loss.

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.

In Q2, the group spent $5.8bn on capital expenditure, 23% more than last year, leaving it well on target to hit its full-year guidance of $20bn-$22bn. The group generated $6.5bn of free cash flow to leave net debt of $43.2bn, with gearing at a comfortable 19%.

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 $72) 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.

With today’s results, a Q2 dividend of 35.8c a share was declared, 4.1% above the same quarter last year. A similar rate of growth for the full year would generate a yield of 4%. With the latest $3.5bn share repurchase programme completed, a new $3.5bn buyback has been announced today to be completed by the end of October. As a result, total shareholder returns in 2025 could 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

Unilever has today released first-half results which were slightly better than market expectations. The productivity programme is running ahead of schedule and the demerger of the Ice Cream business is on track. The company has reconfirmed its full-year outlook and in response the shares are little changed in early trading.

Unilever is one of the world’s leading suppliers of consumer goods, with annual sales of more than €60bn across five business groups: Beauty & Wellbeing (22% of 2024 sales), Personal Care (22%), Home Care (20%), Foods (22%), and Ice Cream (14%). Its products are low-ticket, repeatable purchases, with 3.4bn people using a Unilever brand every day. With unique routes to market, the company has an unrivalled emerging market presence and generates more than half of its sales from those parts of the world expected to experience strong long-term growth in demand. In particular, the group’s 62% holding in India-listed Hindustan Unilever Limited provides exposure to the largest consumer goods company in India.

The company is in the process of separating its Ice Cream unit, a business that has distinct characteristics compared with Unilever’s other activities. The operational separation has been completed and the business is on track for demerger in mid-November. Upon demerger, Unilever will retain a c. 20% stake for a period of up to five years.

Post the separation of Ice Cream, Unilever will be focused on four fairly equally-weighted Business Groups: Beauty & Wellbeing, Personal Care, Home Care, and Foods. Under the group’s Growth Action Plan (GAP) 2030, the Business Groups will be driven by 30 Power Brands (including Dove, Hellmann’s, and Domestos) that account for 75% of turnover and operate across 24 Business Group-led markets, which represent nearly 85% of turnover. The remaining 100+ smaller markets will be run on a ‘One Unilever’ basis to benefit from scale and simplicity, further enhancing the group’s focus.

The productivity programme has been accelerated and is anticipated to deliver total cost savings of around €800m over the three years to end 2026, more than offsetting the estimated operational dis-synergies from the separation of the Ice Cream unit. The programme is running ahead of plan and is expected to deliver an aggregate €650m of savings by the end 2025.

The aim will then be to deliver mid-single digit underlying sales growth, supported by underlying volume growth of at least 2%. The company expects modest underlying operating margin improvement, driven by gross margin expansion through operating leverage and productivity improvements. The company is also targetting around 100% cash conversion over time and has a ROIC ambition in the high teens.

At the beginning of March, CFO Fernando Fernandez succeeded Hein Schumacher as CEO. Prior to becoming CFO in January 2024, he had a successful tenure as President of Beauty & Wellbeing, one of Unilever's fastest growing businesses. The move came as a surprise and appears to have been driven by the Board who were keen to further accelerate the pace of change within the company.

Back to today’s results. As expected, market conditions remain challenging. In the first half of 2025, turnover fell by 3.2% to €30.1bn. Underlying sales growth (USG) – adjusted for the impact of currency headwinds (-4.0%) and net disposals (-2.5%) – was 3.4%. The rate of growth in Q2 (3.8%) was above Q1 (+3.0%) and the market forecast of 3.6%. Growth was driven by underlying price growth of 1.9%, while volume rose 1.5%. The 30 Power Brands, which account for over 75% of revenue, grew by 3.8%.

In emerging markets, USG was 2.8%, held back by Indonesia (-4.8%) and China (down in the low single digits) where distribution issues are currently being addressed. The company saw n sequential improvement in both countries in Q2 and expects to see the benefits of these actions in the second half. Developed markets grew by 4.3%.

All five businesses reported growth:

-          Beauty & Wellbeing (3.7% USG to €6.5bn) - led by the continued strong performance of the Wellbeing business, which more than offset subdued growth in beauty.

-          Personal Care (+4.8% to €6.5bn) - with Dove growing high single-digit.

-          Home Care (+1.3% to €5.9bn) - led by strong momentum in Europe which was partially offset by a decline in Latin America.

-          Foods (2.2% to €6.6bn) - with improved growth in the second quarter.

-          Ice Cream (5.9% to €4.6bn) – with Magnum up double-digit.

The gross margin was flat at 45.7%, despite a tough year-on-year comparative. The result reflects continued efforts to drive structural gross margin improvements and benefitted from higher-than-expected net productivity and procurement savings. This fuelled increased brand and marketing investment, up 40 basis points to 15.5%.

As expected, the underlying operating margin fell in the half-year, although the 30 basis points underlying decline to 19.3% was better than expected. Underlying operating fell by 4.6% to €5.8bn, a shade above the market forecast of €5.7bn, while underlying EPS fell by 2.1% to €1.59.

Free cash flow of €1.1bn was down 50%, reflecting lower operating profit, Ice Cream separation costs, and higher working capital. However, for the full year the company continues to expect cash conversion of around 100%. Net debt rose from €24.5bn to €26.4bn, 2.1x EBITDA and in line with guidance of around 2x. The company completed its €1.5bn share buyback programme in May. In addition, the quarterly dividend has been increased by 3% to €0.4528, although in Sterling terms it is up 6% at 39.16p.

The company was active on the M&A front during the latest quarter, most notably in June with the $1.5bn acquisition of men’s personal care brand, Dr. Squatch which aims to expand Unilever’s portfolio in premium markets. Dr. Squatch, known for its natural, high-performance personal care products and innovative marketing strategies, has reached millions through its retail and direct-to-consumer model. Given the group’s mixed M&A track record, this deal will be closely watched to see if its generates a positive shareholder return.

Looking forward, although the company warns of ongoing subdued market conditions, it has reiterated its full-year guidance for underlying sales growth to be within the multi-year range of 3% to 5%, with growth expected to improve as we go through the year. Growth will be underpinned by a strong innovation pipeline, good momentum in developed markets, and improvements in Indonesia and China in the second half.

The group is guiding to an improvement in underlying operating margin for the full year, with second-half margins of at least 18.5%, a significant improvement versus the second half of 2024.

Looking at the potential impact of tariffs, we note that Unilever has over the years “near-shored” its US supply chains to the degree that “almost everything” it sells in the US is made locally. As a result, the company believes the direct impact of tariffs on its profitability will be limited and manageable.

Source: Bloomberg