Shell plc (LSE: SHEL) posted stellar earnings for their first quarter of fiscal 2023, as a slide in oil prices failed to pressure their top-line growth. With the energy sector booming in the latter parts of 2022 on surging commodity prices due to Russia’s invasion of Ukraine, all eyes were on the company’s performance in conditions where commodity prices no longer serve as a tailwind for growth. 

Shell’s annual profits surged to a record high last year as oil and gas prices skyrocketed. Since then, these commodities have seen a reduction in their trading value, pressuring Shell to maintain its growth trajectory. The company did not disappoint, beating consensus on the top and bottom lines in a solid first quarter. 

Technical 

A symmetrical triangle has formed on the daily chart, where the bulls are paring losses from the mid-March selloff. Currently, at the Fibonacci midpoint of 23.87, which is also the daily pivot resistance, the bulls will be looking at a breakout on the solid fundamental backing from the Q1 results. 

The triangle resistance exists at the Fibonacci golden ratio of 24.395, where a breakout could lead the bulls toward higher resistance at 24.965. The estimated fair value on a discounted cash flow basis is at 25.560, presenting a 6.5% potential upside from current levels. 

Conversely, if the bears turn the momentum around for a triangle breakdown, the 38.2% and 23.6% Fibonacci retracement levels could become potential entry points for the bullish investor confident in the company’s growth story at 23.320 and 22.660. Lower support is established at 21.780 and 20.785 in the case of further downside from macroeconomic headwinds. 

Fundamental 

Shell reported $86.96Bn in revenue for the first quarter, up from $84.20Bn in the prior-year quarter. The attributable income of $8.71Bn soared 22% from $7.12Bn, to round off a double beat, where analysts were expecting $7.88Bn attributable income on revenue of $79.16Bn. Adjusted earnings of $9.65Bn grew 6% from the same quarter in 2022, as the company benefitted from improved performance in its chemicals segment to offset the effect of lower oil and gas prices. The tailwind of higher commodity prices has been an industry-wide phenomenon, with energy companies boasting soaring profits in the aftermath of Russia’s invasion of Ukraine. The graph below shows the spike in industry-wide top-line growth in recent quarters. 

However, in Q1 of 2023, commodity prices slid, removing this tailwind. Shell maintained top-line growth through solid trading performance and resilience in its chemical segment. While their Integrated Gas segment was down 18% quarter on quarter, it was still its second-best performance ever, with the Chemicals and Refined Products segment boasting quarterly growth of 139%. Through the robust quarterly results, Shell announced the repurchase of another $4Bn worth of shares while keeping their dividend unchanged at $0.2875 per share.  

The healthy return to their shareholders in the form of share repurchases and dividends is worth noting, especially when analysing the sustainability of these returns. The graph below shows the company’s debt position relative to the amount of cash on hand and the free cash flow it can generate. It becomes evident that their long-term debt position is decreasing while they maintain their cash on hand and grow the company’s free cash flow generating ability. These metrics bode well for the company’s sustainability in rewarding its shareholders.

In terms of share price performance, all the major players in the industry have outperformed the broader S&P 500 over the last three years, with Shell having the second most impressive price return of 80.75%. With performance more than double that of the S&P 500, investors can feel satisfied with their return. However, the graph only tells half a story, as the company has underperformed the S&P over a five and ten-year period, as its volatility and dependence on a solid commodity market pose significant risks over the long term. 

Summary 

Shell posted yet another impressive quarterly report, exceeding expectations amid a period where commodity prices slid. While current macro headwinds remain, as the oil price is under pressure amid recessionary fears, Shell has shown resilience in maintaining their top-line growth. If the company can continue to sustainably reward its investors and grow their top and bottom line at the current pace, the estimated fair value of 25.560 does not seem far out of reach. 

Sources: Koyfin, Tradingview, Reuters, Shell plc., News24