Natural gas has explosively punctuated the tenure of Shell’s chief executive Ben van Beurden. A year after his January 2014 appointment, he gambled on the expensive £35bn ($52bn) acquisition of liquefied natural gas producer BG Group. This week, as van Beurden announced his retirement, gas lies at the heart of the Ukraine war and Europe’s economic distress.
Gas has relatively low emissions when fully combusted. It should figure as a stepping stone in the crossing to a low-carbon economy. New boss Wael Sawan must navigate Shell through that transition. A suave communicator, Sawan must convince the City that Shell’s relatively sluggish shares are worth buying.
Shell’s total returns — in this case, including dividends but not buybacks — have hardly dazzled under van Beurden. Larger rivals such as Chevron and Exxon have delivered more for shareholders, as has France’s TotalEnergies. Shell looks historically cheap versus earnings, at about three times forward ebitda.
This presents a big challenge for Sawan, latterly in charge of integrated gas and renewables. So far, Shell has not devoted much of its capital expenditure budget to renewables. The figure of 15 per cent is about half the total for BP and TotalEnergies.
BP and TotalEnergies also trade cheaply. Markets are not convinced renewables will earn sufficient returns above cost of capital. Last year, a Dutch court found Shell needed to reduce emissions faster. But spending alone will not suffice.
Sawan needs to squeeze the most he can from Shell’s gas assets. These already make up about 30 per cent of ebitda. The BG acquisition forced Shell to sell other assets and reduce investment. Though perhaps an old-fashioned way of evaluating oil producers, the amount of reserves over average annual production has shrunk by a third since 2013 to eight years, much more than large peers, says Citi.
Van Beurden’s parting gifts to his successor are strong free cash flow and a very clean balance sheet. Sawan must now show investors he can increase earnings smartly during the energy transition.
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