Shell PLC (LSE:SHEL, NYSE:SHEL) endured a tough time on the markets today with shares falling 4.6% after it warned that third-quarter profits would be hit by a near halving in refining margins, falling chemical margins and weaker trading in its Integrated Gas (IG) business.
Broker UBS said the trading update points to a weaker third quarter than it expected, primarily driven by results from its IG division where Shell flagged that trading performance is expected to be much lower when compared to the second quarter as a result of seasonality and market volatility.
IG production was at 890-940k barrels of oil equivalent per day (boe/d), in line with previous guidance, UBS said, while upstream production was slightly higher at 1,750-1,850k boe/d against previous guidance of 1,750-1,950k boe/d, bringing total production to 2,640-2,790k boe/d, below the broker’s estimate of 2,896k boe/d.
LNG liquefaction volumes were in line with guidance at 6.9-7.5Mt, the broker said, but the Renewables and Energy Solutions segment is expected to deliver earnings between -US$300mln and US$300mln, a wide range and compared to the broker’s forecast of US$270mln.
The Downstream division was also weaker than expected, UBS said, with Shell expecting an earnings decrease of US$1.0-1.4bn from the previous quarter due to lower refining margins, as the indicative refining margin of US$15/bbl in the third quarter fell from US$28/bbl in quarter two.
Refining utilisation for the third quarter is also expected to be lower than previous guidance, while trading and optimisation results are expected to be in line with the second quarter.
The Chemicals indicative margin is expected to be negative at -US$27/tonne vs US$86/tonne in the second quarter and utilisation is expected to be at 75-79%, lower than previous guidance of 82-90%, UBS said, with the fall in margin expected to have a negative impact of US$300-US$600mln on EBITDA.
Combined, UBS calculated this means a decrease of US$1.3-US$2.0bn quarter on quarter compared to the consensus for a decrease of US$0.4bn.
The working capital outflow of US$2.5bn as of end-August was also above consensus forecasts of US$1.8bn, the broker said.
Nevertheless, UBS kept its buy rating on Shell with a price target of 2,650p.