(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Yawen Chen
LONDON, May 7 (Reuters Breakingviews) – Shell is reaping the benefits of high fossil fuel prices. The $240 billion oil and gas major on Thursday reported first-quarter adjusted earnings of $7 billion, up nearly 25% year on year, as oil prices surged past $100 a barrel. Yet when it comes to shareholder rewards, Chief Executive Wael Sawan is tightening the taps.
Although Shell increased dividends by 5%, Sawan also cut quarterly buybacks to $3 billion from $3.5 billion. That means total distributions are 8% lower year-on-year, Citi analysts estimate. One reason for caution is Shell’s Gulf exposure, which accounts for 20% of its oil and gas production per HSBC. But another big driver is that Shell’s longer-term reserve situation is a problem that requires investment to fix.
Sawan has long sold investors on his disciplined turn away from unprofitable projects and focus on returns. The strategy has worked: Shell’s shares have outperformed peers including ExxonMobil and Chevron since he took office in 2023. The flipside is a risk of underinvesting in the reserves needed to sustain future production. Bernstein analysts reckon the company’s reserve life is 7.4 years, below those of its large rivals.
That may now be showing up in Shell’s valuation. The group trades at about 6 times enterprise value to debt-adjusted cash flow, at a discount even to European rivals like TotalEnergies and ENI, according to Citi. Some of that is down to concerns about output strength beyond 2030. Sawan could use the current high prices as a cue for new fossil fuel exploration. Given this takes time and luck, a swifter fix is M&A. Last month he acquired Canadian producer ARC Resources for $16 billion including debt. That has narrowed a 350,000-barrel-per day of liquids production gap between Shell’s own production goals and what its current assets can deliver by 2035. But it hasn’t closed it.
Handily, Shell’s balance sheet is robust enough. Sawan is funding the ARC deal mostly with the company’s shares, and net debt sits at just 0.5 times trailing cash flow from operations. With downstream operations generating resilient cash and shares up 15% this year, Shell can afford to shop. A logical place to expand is a region where it has expertise, such as deepwater projects in the Gulf of Mexico. While fellow big hitters like BP and Chevron may not play ball, other players like Occidental Petroleum or Kosmos Energy might be persuadable to sell assets at the right price. In December Reuters reported Shell was in advanced talks to buy LLOG Exploration Offshore in a deal worth more than $3 billion, citing sources familiar with the matter. Coming only five years after Shell sold out of the Permian Basin, bulking up in the U.S. again might seem an odd look. But that was before Sawan’s tenure. And it would directly address Shell’s main headache. Follow Yawen Chen on Bluesky and LinkedIn.
CONTEXT NEWS
Shell reported on May 7 that its first-quarter adjusted earnings, the company’s definition of net profit, rose to $6.9 billion, beating an analyst consensus of $6.4 billion in a company-provided poll and up from $5.6 billion in the same period a year earlier.
Shell also slowed its quarterly share buyback programme to $3 billion from $3.5 billion to help allocate cash to its balance sheet. At the same time, it raised the dividend by 5%.
Shell’s oil and gas output fell 4% compared with the previous quarter, mainly due to outages in Qatar where part of its Pearl gas-to-liquids plant was damaged in the Middle Eastern conflict that began at the end of February. Full repairs might take about a year, Shell has said.
Shell’s gearing, or debt to equity ratio including leases, rose to 23.2% from 20.7% at end-2025. The company had flagged higher debt due to managing war-related price and supply disruptions and volatility.
Shell’s shares were down 2% as of 0840 GMT on May 7, broadly in line with other oil majors’ shares.
(Editing by George Hay; Production by Shrabani Chakraborty)