Shell hit by crumbling margins in chemicals and refining

London — Shell said on Thursday its third-quarter profit would be under pressure by a near halving of oil refining margins, crumbling chemical margins and weaker natural gas trading.       

The British energy giant reported two consecutive quarters of record profit in the first half of the year amid soaring oil and gas prices, and stellar earnings from its trading operations, which are the world’s biggest.

Its shares were down 4.3% in early morning trade — compared with a 1% decline for the broader European energy sector — before paring losses to 3.36% by midafternoon.

But in the third quarter, indicative refining margins dropped to $15 a barrel from $28 a barrel in the previous three months, Shell said in an update ahead of its results amid growing concerns over a global economic slowdown. Its results are due on October 27.

And indicative margins for chemicals dropped to negative $27 per tonne versus a positive $86 in the second quarter after global demand for plastics slumped.

The drop in refining margins will have a negative effect of between $1bn and $1.4bn  on the segment’s adjusted earnings before interest, taxes, depreciation and amortisation (ebitda), Shell said.

Shell also expects cash generation to be affected by a $2.5bn  working capital outflow by the end of August as a result of large fluctuations in oil and gas prices in recent months.

Despite the headwinds, Shell is expected to report net earnings of $10.5bn in the third quarter, according to a Refinitiv average of analysts’ forecasts. That compares with net earnings of $11.5bn in the second quarter.

“Overall, we see the statement as disappointing given the weaker IG (Integrated Gas) trading result, coupled with another working capital outflow,” RBC Capital Markets analyst Biraj Borkhataria said in a note.

“We would expect to see consensus downgrades on the back of this update,” he added. RBC has an outperform recommendation on Shell.

Shell’s third-quarter liquefied natural gas (LNG) and gas trading results are expected to be “significantly lower” due to lower seasonal demand as well as “substantial differences between paper and physical realisation in a volatile and dislocated market”.

Oil trading is expected to be in line with the previous quarter.

US rival ExxonMobil on Tuesday signalled strong third-quarter operating profits as earnings from natural gas offset weaker refining and chemicals.

Reuters