This could signal that the record-breaking earnings run by the energy giant may be over.
The FTSE 100 company reported a negative margin in its chemical unit of $27 per metric tonne, which is often interpreted as an indicator of the strength of the wider economy.
This could indicate a worrying outlook for Europe’s major industries, which are finding it difficult to deal with rising gas prices.
Shell also reported a decrease in its refining margins due to lower oil prices.
Shell is cashing in on the soaring prices caused largely by Russia’s invasion of Ukraine and posting record profits of $11.5bn for the second quarter.
The numbers suggest that this run may be over. Analysts at RBC labelled the update “disappointing”, but the figures show otherwise.
#Shell has issued a profit warning for the third quarter in a sign the energy giant’s record run of earnings could be coming to an end. Analysts at RBC branding the update “disappointing” #SHEL Shares fell as much as 4.71%. Shell is dragging down the FTSE 100 this morning pic.twitter.com/jcUz9Gzz0w
— Share_Talk ™ (@Share_Talk) October 6, 2022
Shares dropped to a low of over 4% in morning trading.
Shell stated that the refining margins fell to $15 per barrel in the third quarter compared to $28 per barrel in the three previous months. This was despite growing concerns about a slowdown in global economic growth.
After the slump in global demand for plastics, indicative margins for chemicals fell to a negative $27 per tonne versus a positive $86 during the second quarter
Shell stated that the drop in refining margins would have a negative effect of $1 billion to $1.4 billion on the segment’s adjusted earnings after interest, taxes and amortization (EBITDA).
Shell expects that cash generation will be affected by a $2.5 Billion working capital outflow before August due to large fluctuations in oil prices.
According to Refinitiv’s average of analysts’ forecasts, Shell will report net earnings of $10.5 million in the third quarter despite the headwinds. This compares to net earnings of $11.5 million in the second quarter.
Biraj Borkhataria, RBC Capital Markets analyst, stated in a note that “Overall, the statement is disappointing given the weaker IG(Integrated Gas) trading results, combined with another working capital flow.”
He said, “We would expect to hear consensus downgrades in light of this update.” RBC has a recommendation for Shell to “outperform”.
Shell’s third quarter liquefied natural gases (LNG), and gas trading results are expected “significantly lower” due to lower seasonal demand and “substantial differences among paper and physical realization in volatile and dislocated markets.”
Expect oil trading to be similar to the last quarter.
