Morningstar DBRS Confirms Issuer Ratings of AA (low) with Stable trends for Shell plc and Shell International Finance B.V.

DBRS Ratings Limited (Morningstar DBRS) confirmed its AA (low) Issuer Ratings on both Shell plc and Shell International Finance B.V. (SIFBV). The trends on the credit ratings remain Stable.

Shell plc is the UK-incorporated parent company of the Shell Group (Shell or the Company). 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. SIFBV's debt is fully and unconditionally guaranteed by Shell plc.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Shell's strong business risk assessment and are supported by its large size, well-diversified operations, global presence in key markets, and substantive market position in downstream operations. Shell's oil and gas (O&G) production remained relatively stable in 2023 at 2.7 million barrels of oil equivalent per day (mmboe / d) compared with 2.8 mmboe / d in 2022, which remains consistent with Morningstar DBRS' expectations and the Company's target to maintain its liquids production stable at circa 1.4 mmboe / d to 2030 (2023: 1.45 mmboe / d, excluding oil sands).

The credit ratings also consider the Company's large shareholder distributions, which have exceeded Shell's guided range of 30% to 40% of Company-adjusted cash flow from operating activities (CFFO) in recent periods. The Company reported that the sum of cash dividends paid to Shell shareholders and repurchases of shares equated to 42% of its CFFO in 2023 and 43% in the last twelve months (LTM) to 30 June 2024. This translates to about 50% to 60% of cash flow from operations under Morningstar DBRS' definition. Looking ahead, Morningstar DBRS expects oil prices and Shell's earnings to decrease over the forecast period and that ongoing returns to shareholders will partially constrain the Company's free cash flow available for debt reduction and likely result in weaker key financial metrics compared with current levels. Notwithstanding, Morningstar DBRS expects that Shell will manage its shareholder remuneration within its stated capital allocation targets and that its key credit metrics will remain supportive of the credit ratings, resulting in the Stable trends.

CREDIT RATING DRIVERS
Morningstar DBRS may consider a negative credit rating action if Shell's financial metrics deteriorate, such as its net debt-to-cash flow ratio trending negatively toward 1.5x on a sustained basis. A negative credit rating action could also be considered if shareholder remuneration is not adjusted in line with market conditions and results in a strain on the Company's surplus cash flow generation. While unlikely in the near-to-medium term, Morningstar DBRS could consider a potential positive credit rating action if, all else being equal, Shell's financial metrics show material and sustained improvements such as its net debt-to-cash flow ratio trending below 0.5x on a sustainable basis. Morningstar DBRS could also consider a positive credit rating action if the Company's business risk profile, which is already very strong, improved materially.

EARNINGS OUTLOOK
Given Morningstar DBRS' assumption of weaker commodity prices in 2025 and 2026, it is anticipated that Shell's average realisations will decrease from current levels, resulting in a reduction in the Company's revenue in the forecast period to 2026. However, Shell's progress in its cost saving programme, growth in its liquefied natural gas (LNG) portfolio, and its emphasis on improving its upstream operational performance and high grading its downstream portfolio should provide a degree of stabilisation to its earnings. As such, Morningstar DBRS forecasts that Shell's adjusted EBITDA (including dividends from equity investments) will reduce from $64 billion as of the LTM to 30 June 2024 towards $60 billion in 2024, and then stabilise to an annual average of about $55 billion for 2025 and 2026.

FINANCIAL OUTLOOK
Morningstar DBRS expects Shell's cash flow from operations to follow a similar trend as projected earnings and that operating cash flows will remain sufficient to cover capital expenditures (capex) of $22 billion to $25 billion per annum and a 4% annual progression in dividends, commensurate with Shell's public guidance. Year-to-date to 30 June 2024 (H1 2024), Shell has completed $6.8 billion of share buybacks, and it has announced a further share buyback of $3.5 billion to be completed by its Q3 2024 earnings announcement (expected 31 October 2024). For future periods, the Morningstar DBRS forecast assumes that Shell will manage its share repurchases within its surplus cash flow as per the Company's shareholder distribution policy and its stated priority of maintaining a strong balance sheet. Based on the forecasting assumptions to 2026, Morningstar DBRS expects Shell's key financial metrics to weaken from current levels though remain supportive of the credit ratings, including a net debt-to-cash flow ratio of less than or broadly equal to 1.3x, EBIT-to-Interest of at least 7x, and net debt-to-capital below 25%.

CREDIT RATING RATIONALE
For the LTM period ended 30 June 2024, Shell's daily O&G production and average realisations remained relatively commensurate with the 2023 levels, supporting a stabilisation in earnings. Shell has made progress on its strategy with $1.7 billion of cumulative cost reductions delivered since the end of 2022 against its target to deliver $2 billion to $3 billion in structural cost savings by 2025. The Company's total gross debt has also reduced year-to-date to $75 billion (2023: $82 billion), in line with its commitment to maintain balance sheet strength. As such, Shell's key credit metrics have shown some improvement since year-end 2023 including a net debt-to-cash flow ratio of 0.9x for the LTM to 30 June 2024 (2023: 1.2x) and a net debt-to-capital ratio of 19% (2023: 20%). Shell's total liquidity is satisfactory with unrestricted cash and equivalents of about USD 38 billion as of H1 2024 and committed credit facilities totalling $9.9 billion, which were undrawn as of 2023.

The credit ratings assigned to Shell plc and SIFBV are aligned, based on a consolidated credit analysis of Shell plc and its subsidiaries. SIFBV is one of Shell Group's centralised treasury entities and holds a material portion of the Company's debt, which is fully and unconditionally guaranteed by Shell plc. As of 4 October 2024, Shell has confirmed that it will exchange around $11.5 billion of notes issued by SIFBV to instead be issued by Shell Finance US Inc. Shell's stated purpose for the transaction is to optimise the Company's capital structure and to align indebtedness with its U.S. business. Morningstar DBRS views this transaction as credit neutral to Shell plc and SIFBV's credit ratings because the new exchanged debt is also guaranteed by Shell plc, offered on identical terms as the existing notes, and will rank pari passu with SIBFV's remaining notes.

Morningstar DBRS' base-case commodity price assumptions are available in its "Geopolitical Angst Continues to Support Crude Prices, Excess Inventory Persists in Gas Market" commentary, published on 17 October 2024 - https://dbrs.morningstar.com/research/441330. Shell's net debt, as calculated by Morningstar DBRS, is net of unrestricted cash and equivalents exceeding $5 billion.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The Carbon and Greenhouse Gas (GHG) Costs Environmental factor had a relevant effect on the credit analysis of Shell. The Company is subject to risks and uncertainties associated with increased environmental regulations in all jurisdictions in which it operates. Environmental regulations mandating the reduction of GHG emissions add costs for all O&G companies, including Shell. Shell's annual carbon cost exposure is expected to increase by 400% over the next decade because of evolving carbon regulations to around $4 billion by 2033. Shell is well equipped to absorb these additional costs because of its large size and substantial financial resources. The Company is also well equipped to face the changing regulatory environment because of its considerable geographic and operational diversification, and its progress towards its emissions targets. Such progress includes its efforts to improve its energy efficiency and lower its scope 1 and 2 emissions, reduce its emissions of methane, grow and decarbonise its liquefied natural gas (LNG) portfolio, grow its deep-water O&G business (which produces lower-carbon barrels), and offer more low-carbon solutions in its downstream segments. These factors provide Shell with greater flexibility to address the regulatory risks associated with the increased focus on energy transition.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
A) Weighting of BRA Factors
In the analysis of Shell, the BRA factors listed in the Oil & Gas section of the methodology were considered in the order of importance contemplated in the methodology

B) Weighting of FRA Factors
In the analysis of Shell, the FRA factors listed in the Oil & Gas section of the methodology were considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of Shell, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Oil and Gas, Oilfield Services, Pipeline and Midstream Energy Industries (12 August 2024) - https://dbrs.morningstar.com/research/437739.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024) - https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) - https://dbrs.morningstar.com/research/437781
Morningstar DBRS Global Corporate Criteria (15 April 2024) - https://dbrs.morningstar.com/research/431186

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

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for these credit ratings include Shell's consolidated 2023 Annual Report and Accounts, its 2023 Sustainability Report, the Company's second quarter 2024 results and accompanying enclosures, and other public information and enclosures available on Shell's website. Morningstar DBRS 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

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/441338.

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: Ravikanth Rai, Senior Vice President, Sector Lead
Initial Rating Date: 18 October 2023
Last Rating Date: 18 October 2023

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com/ or contact us at info-DBRS@morningstar.com.

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