DBRS Morningstar Assigns Issuer Ratings of AA (low) With Stable Trends to Shell plc and Shell International Finance B.V.

DBRS Ratings Limited (DBRS Morningstar) assigned Issuer Ratings of AA (low) with Stable trends to Shell plc and its subsidiary, Shell International Finance B.V. (SIFBV).

Shell plc is the UK-incorporated parent company of the Shell Group (Shell or the Company), one of the world's largest integrated energy and petrochemical companies. SIFBV is incorporated in the Netherlands as a wholly owned subsidiary of Shell plc to assist the Company in raising funds and to provide on-lending to other Shell Group entities.

KEY CREDIT RATING CONSIDERATIONS

The AA (low) credit ratings reflect Shell’s large size, well-diversified operations, global presence in key markets, and substantive market position in downstream operations. The Company also benefits from relatively low leverage and solid financial metrics as demonstrated by DBRS Morningstar-adjusted net debt-to-cash flow of approximately 0.7 times (x), DBRS Morningstar-adjusted net debt-to-capital of about 20%, and DBRS Morningstar-adjusted EBIT-to-interest of circa 17x, all as at the year ended 31 December 2022 (F2022). The credit ratings also consider the high level of shareholder distributions expected to be made by the Company throughout the medium term, as well as DBRS Morningstar’s assessment of Shell’s relatively shorter proved reserve life index when compared with other large industry peers.

CREDIT RATING DRIVERS

The Stable trends reflect DBRS Morningstar’s expectation that Shell’s financial metrics will continue to support the current credit ratings for at least the next 12 months. DBRS Morningstar may consider a negative credit rating action if, all else being equal, Shell’s financial metrics deteriorate, such as DBRS Morningstar-adjusted net debt-to-cash flow trending negatively toward 1.5x on a sustained basis. A negative credit rating action could also be considered if shareholder-friendly initiatives become more aggressive and put a strain on the Company’s free cash flow generation. DBRS Morningstar could consider a potential positive credit rating action if, all else being equal, financial metrics show material and sustained improvements such as DBRS Morningstar-adjusted net debt-to-cash flow trending below 0.5x and DBRS Morningstar-adjusted EBIT-to-interest trending above 20x, both on a sustainable basis. DBRS Morningstar could also consider a positive credit rating action if there were to be material improvement in the Company’s business risk profile, which is already very strong.

CREDIT RATING RATIONALE

The credit ratings assigned to Shell plc and SIFBV are aligned, as SIFBV acts as a centralised treasury function for the Shell Group and holds a gross majority (circa 90%) of the Company’s consolidated total financial debt. As such, DBRS Morningstar assesses the risk of structural subordination to be largely mitigated, and therefore has employed a consolidated credit approach in its credit analysis based on the consolidated reporting of Shell plc and its subsidiaries.

Shell reported strong performance in F2022 on the back of high energy realisations, despite a decrease in the Company’s oil and gas production to 2.86 million barrels of oil equivalent per day (MMboe/d) from 3.24 MMboe/d in F2021, as a result of divestments including the derecognition of Russian assets during the year in response to the conflict in Ukraine. The Company’s F2022 DBRS Morningstar-adjusted revenue and EBITDA were USD 381.3 billion and USD 81.6 billion, respectively (F2021: USD 261.5 billion and USD 49.2 billion). Year-to-date to 30 June 2023 (H1 2023), DBRS Morningstar-adjusted revenue and EBITDA were USD 161.5 billion and USD 32.7 billion (H1 2022: USD 184.3 billion and USD 42.3 billion), with the year-over-year reduction due to lower realisations and the continued impact of divestments on volumes. The Company’s total gross debt as at H1 2023 was USD 84.4 billion, and Shell’s total liquidity is satisfactory with a cash balance of USD 45.1 billion and an undrawn committed credit facility of USD 9.9 billion, both as at 30 June 2023. The Company also has access to commercial paper programmes of up to USD 20 billion, supported by the credit facility and cash on hand.

Following previous announcements that Shell would be reducing its oil production by 1% to 2% per year in line with its net-zero targets, in its June 2023 Capital Markets Day, Shell updated that the Company had met its target via divestments and will now maintain stable liquids production at circa 1.4 MMboe/d to 2030 (F2022: 1.46 MMboe/d). In the same time horizon to 2030, the Company has stated its goal to grow its integrated gas portfolio, including expanding its liquefied natural gas (LNG) liquefaction capacity by 11 million tonnes and increasing LNG purchases by 15% to 25% from F2022 volumes. The Company has also outlined intentions to high-grade its portfolio and to deliver operational efficiencies including USD 2 billion to 3 billion in structural cost reductions by the end of 2025.

The Company recently announced increased shareholder distributions, with a target for total dividends and share buybacks to equate to 30% to 40% of Company-reported cash flow from operations (CFFO). This updated guidance includes a 15% dividend increase announced to date in F2023, as well as USD 8.0 billion of share buybacks completed year-to-date to H1 2023 with additional buybacks of circa USD 5.5 billion anticipated in H2 2023. Through the medium term, the Company continues to target annual dividend progression of 4% while DBRS Morningstar anticipates that share buybacks will fluctuate based on available CFFO per the Company’s updated guidance. The Company’s cash capital expenditure (capex) guidance has reduced from prior estimates, with updated expectations of USD 23 billion to 26 billion in F2023 and USD 22 billion to 25 billion per year for F2024 and F2025.

In its forecast through to F2025, as per DBRS Morningstar’s base case commodity price assumptions and Shell’s guidance of stabilised liquids production, DBRS Morningstar estimates that revenues and earnings will materially contract as compared with F2022 because of reductions in energy realisations. DBRS Morningstar expects F2023 EBITDA to be broadly in line with annualised H1 2023 results and forecasts moderate continued EBITDA contraction to F2025 based on its energy price assumptions. DBRS Morningstar expects DBRS Morningstar-adjusted cash flow from operations to follow a similar trend to projected earnings. Nevertheless, DBRS Morningstar forecasts that operating cash flows will be sufficient to cover capex and dividends commensurate with Shell’s public guidance. DBRS Morningstar expects share buybacks to fluctuate annually based on available cash flow with average annual buybacks through to F2025 of circa 50% relative to F2022 levels, resulting in moderate levels of cash generation available for potential debt repayment. Based on its forecasting assumptions to F2025, DBRS Morningstar expects DBRS Morningstar-adjusted net debt-to-cash flow to remain below 1x, DBRS Morningstar-adjusted EBIT-to-interest to remain above 10x, and DBRS Morningstar-adjusted net debt-to-capital to be less than 20%. (Note: net debt, as calculated by DBRS Morningstar, is offset by cash balances in excess of USD 5 billion, and DBRS Morningstar-adjusted EBIT, as used in EBIT-to-interest metrics, includes cash dividends received from joint ventures and associates).

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental (E) Factors

DBRS Morningstar considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Shell. This factor was assessed as relevant because of the ever-increasing environmental regulations and legislation targeting the reduction of GHG emissions, which limit the growth potential and add costs for all oil and gas companies, including Shell. DBRS Morningstar considered this factor as relevant, as it has assessed that Shell is well equipped to face these potential regulatory impacts because of the Company’s progress towards its net-zero emissions targets, its considerable geographic and operational diversification, as well as its substantial financial resources.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (16 August 2023), https://www.dbrsmorningstar.com/research/419228/global-methodology-for-rating-companies-in-the-oil-and-gas-and-oilfield-services-industries

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The primary sources of information used for these credit ratings include Shell’s consolidated Annual Reports and Accounts for F2018 to F2022, Q4 2022 results presentation, F2022 annual dataset supplement, 2023 Capital Markets Day presentation and remarks, Q2 2023 results and presentation, Q2 2023 databook supplement, SIFBV’s 2022 annual report, and other public information and enclosures available on Shell’s website. DBRS Morningstar considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/422086.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Chloe Blais, Assistant Vice President
Rating Committee Chair: Tom Currie, Managing Director
Initial Rating Date: 18 October 2023
Last Rating Date: Not applicable as there is no last rating date.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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