ii view: Shell pumps out mixed third-quarter update

Third-quarter trading update to 30 September

• Expects LNG liquefaction volumes of 7.3 million to 7.7 million metric tons, up from a previous 6.8 million to 7.4 million tons
• Expects a refining margin of $5.5 a barrel, down from $7.7 a barrel in Q2

ii round-up:

Energy giant Shell (LSE:SHEL) today reported mixed divisional trading performances ahead of third-quarter results scheduled for 31 October. 

Liquefied Natural Gas (LNG) volumes at its integrated gas business are now expected to come in at 7.3-7.7 million metric tons, up from a previous forecast of 6.8-7.4 million tons. 

Shares in the FTSE 100 company rose 1% in UK trading having come into this latest news little changed year-to-date. That’s similar to rival TotalEnergies SE (EURONEXT:TTE) and ahead of a 10% fall for BP (LSE:BP.). Brent crude oil is up around 2% in 2024, while the FTSE 100 index itself has risen 7%.

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Formerly Royal Dutch Shell, the group moved its headquarters to the UK in 2022. The indicative refining margin for its downstream business is expected to fall to $5.5 a barrel during this latest quarter, down from $7.7 a barrel in the prior second quarter.

Slowing economic growth in China has reduced demand for oil during 2024, with new refining operations across the industry also weighing on company specific profitability. 

Shell expects adjusted profit at its renewables and energy solutions division to come in somewhere between a loss of $400 million and a profit of $200 million. That’s potentially up from an adjusted loss of $187 million in Q2. 

Cost reductions totalling $1.7 billion since 2022 aided the oil major’s second-quarter profit performance, with a recent press report pointing to further planned job cuts. 

ii view:

Shell employs over 100,000 people across 70 countries. Integrated Gas accounts for its biggest slug of profits at around 37%, followed by Upstream ops at 33%, Marketing and Chemicals each at 15%, and a small loss for Renewables and Energy Solutions. 

Geographically, Asia, Australasia and Africa generated most sales in 2023 at 32%, followed by Europe and the USA at close to a quarter each, the UK at 14%, and the Americas the balance of 9%. Shell’s strategy includes further simplifying the company and sharpening performance.

For investors, the tough economic backdrop, particularly for China, continues to offer uncertainty regarding future energy demand. Geopolitical tensions and the speed with which the West’s relationship with Russia changed should not be forgotten. Windfall taxes introduced in reaction to higher energy prices and the war in Ukraine persist, while Shell’s own dialling back of investments in climate friendly operations does not sit comfortably with all investors.  

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On the upside, a recent economic stimulus package announced in China has eased concerns over the outlook there. Shell’s diversity of operations across oil, gas, chemicals, and alternatives regularly allows one area of strength to counter another of weakness. Uncertainty of supply, focused on a possible widening of the Israeli conflict, currently offers support to the oil price, while Shell’s net debt, swollen during the pandemic, has slowly reduced.

On balance, and despite ongoing risks, significant cashflows underpinning a forecast dividend yield above 4% and a consensus analyst fair value estimate above £32 per share, are likely to keep investors interested in this oil major.

Positives: 

• Diversity of operations
• Reducing net debt

Negatives:

• Uncertain economic outlook
• The weather can raise operational challenges

The average rating of stock market analysts:

Buy