With earnings season continuing to play games and take names, Shell, the European energy giant, is on a roll. Due to the company being the latest energy behemoth to beat expectations, Shell is matching Trump’s self-love obsession today as the company announced another $3.5 billion share buyback for the third quarter. 

(Source: CNBC) 

Again, this follows their encouraging second quarter earnings as adjusted earnings hit $6.29 billion, beating market expectations of $6.01 billion. Keep in mind, this metric is still down from the $7.73 billion (a drop of 10% from the previous three months) reported in the first quarter that was mainly due to lower refining margins and a slump in integrated gas trading. But hey, while some may see that as a negative, at least revenue seems to be on the up and up instead of the down and out.  

(Source: Giphy) 

CEO Wael Sawan expressed his optimistic view on the numbers stating, “Shell delivered another strong quarter of operational and financial results.” And even though that seems like a generic and vague thing a CEO says, he’s not wrong. Especially as cash flow from operations is looking thicker than a bowl of Quaker Oats at $13.51 billion (the highest it’s been in a year). 

(Source: Bloomberg) 

So naturally, because of the resurgence Shell seems to be on, the company wants a huge chunk ($3.5 billion) of its stock back in possession. Now for those of you keeping tabs, this isn’t Shell’s first rodeo when it comes to buybacks. In fact, this makes it the 11th consecutive quarter they’ve announced $3 billion or more in buybacks. 

(Source: Giphy) 

But when it comes to investors, is this a good thing or bad thing?

Well for starters, while a buyback simply reduces the number of shares outstanding, basic economics tells us that when supply goes down, demand goes up. So, in theory, this should drive up the stock price. Plus, it’s a way for Shell to return cash to shareholders without having to dish out higher dividends. Win-win, right?

(Source: Giphy) 

Well not quite. Before investors start breaking out the Dom Pérignon, share buybacks aren’t always the golden ticket they’re made out to be. Sure, they can boost stock prices, but they can also mask underlying issues. Think, putting lipstick on a pig.

(Source: Morningstar)

For one, buybacks can sometimes signal that a company doesn’t have better investment opportunities. Whereas instead of pouring cash into new projects or innovation, they’re handing it back to shareholders. Which is kind of like a fancier way of saying “We’ve got more money than ideas”. 

Now in Shell’s case they seem to be making strides with their cash flow by reducing net debt, dropping it by more than $2 billion over the quarter. But with big buybacks, there’s always the risk of stretching the balance sheet too thin. And let’s not forget, this buyback spree comes at a time when the energy market is anything but stable. Crude prices are as volatile as tech during earnings, and refining margins are tighter than my jeans after Thanksgiving dinner.

(Source: Yahoo Finance) 

Plus, this massive $3.5 billion buyback also follows a time where Shell has been trying to walk the tightrope between traditional oil and gas and the push for renewable energy. They’ve made some progress, but critics argue that these buybacks could be better spent on “save planet” initiatives. You know, since politicians say it’s vital to keep our planet from getting hotter than Margot Robbie in a sauna. 

(Source: Giphy) 

But alas, even with all the questions regarding “why the buybacks'', there’s no denying that it could mean good news for shareholders in the short term. Especially since it’s a nice signal that the company is confident in its own financial stability and wants in on the fun. 

However, for you savvy investors, it’s still important to look beyond the surface before Yoloing into a company like Shell. Are buybacks the best use of Shell’s cash? Could that money be better spent on innovation or sustainability efforts? Of course, only time will tell, especially considering the energy world changes faster than Taylor Swift changes boyfriends (count your days Travis).

(Source: Giphy) 

In the meantime though go ahead and check out Shell’s stock. As of right now, the stock is down -1.17% on the day, but considering that it’s up +12.86% over the past six months, this may be the last chance for a dip buy before Shell’s $3.5 billion buyback tsunami goes into effect. 

Warning: As always, don't listen to me, I’m just a financial writer. In fact, I have no idea what a dip buy even means. Isn’t that Cathie Wood’s “Buy High, Sell Low” strategy? Who knows…

Stocks.News doesn't hold any postions in companies mentioned in the article.