Shell sets bigger CO2-reduction target as profit falls short

Royal Dutch Shell plc responded to external pressure by setting a more ambitious target for cutting greenhouse gas emissions from its operations, while reporting an increase in third-quarter profit that fell short of expectations. 

Like its peers, Shell has been lifted by the surge in oil and gas prices, but nevertheless finds itself pulled in many different directions by people unhappy with its plans. Dan Loeb’s Third Point Capital LLC is seeking the breakup of the energy giant, a move that would thwart its plan to keep pumping oil and gas as it embraces renewable energy. A Dutch court has also ordered the company to cut carbon emissions much faster than it had previously planned. 

“This quarter we’ve generated record cash flow, maintained capital discipline and announced our intention to distribute $7 billion to our shareholders,” CEO Ben van Beurden said in a statement on Thursday. Combined with the more ambitious emissions target, “this is clear evidence of how we are accelerating our Powering Progress strategy, purposefully and profitably.”

The Anglo-Dutch company set an absolute carbon-reduction target of 50 per cent by 2030, compared to 2016 levels on a net basis. The new goal covers Scope 1 and Scope 2 emissions, which are directly under Shell’s operational control. It does not affect the bulk of the greenhouse gases resulting from Shell’s business — so-called Scope 3 emissions that are released when customers burn fuel.

That new target is a big jump from Shell’s previous aims, but will have a limited impact overall as Scope 1 and 2 aims represent a small sliver of its carbon footprint. A 50 per cent decrease will only amount to a 2.5 per cent reduction in Shell’s total emissions, including Scope 3, said Shu Ling Liauw, lead analyst at Global Climate Insights.

Shell’s third-quarter adjusted net income was $4.13 billion, up from $955 million a year earlier but well below the average analyst estimate of $5.42 billion. Cash flow from operations jumped to $16.03 billion, compared with $10.4 billion a year earlier. 

The earnings demonstrate “Shell’s capacity to deliver superior free cash flow leverage to the oil and gas recovery,” analysts at JPMorgan Chase & Co. said in a note. “Third Point’s emerging activism on portfolio breakup potential is likely to be supportive” of shares, according to the note. 

In September, Shell sold its Permian oil business to ConocoPhillips for $9.5 billion and promised to return $7 billion of that to shareholders. The company said those additional distributions — which were in addition to buybacks it already announced in the second quarter — will start next year once the deal is completed.

In addition to boosting returns to shareholders, Shell used its extra funds to pay down net debt, which fell to $57.5 billion at the end of the third quarter, compared with $65.7 billion three months earlier. 

Like its peers, Shell kept a tight lid on spending despite surging profits. The company expects capital expenditure to total $20 billion this year, down from previous guidance that went as high as $22 billion. 

© 2021 Bloomberg L.P.

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