ii view: no record profit for Shell after tough third-quarter

Shares for this oil major have comfortably outperformed the FTSE 100 year-to-date, but is that about to change? We assess prospects. 

Third-quarter trading update to 30 September

ii round-up:

Oil giant Shell (LSE:SHEL) flagged weaker third-quarter trading following record first-half profits ahead of results due to be published on 27 October. 

Trading at its integrated gas business was below City expectation, hit by disruption following Russia’s invasion of Ukraine, while its oil and chemical divisions has been hit by recent weakness in prices as demand and recession fears grow following interest rate hikes. 

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Shell shares fell by over 4 in UK trading having come into this latest announcement up by more than two-fifths year-to-date. Rival BP (LSE:BP.) has risen by a similar amount during 2022, while the FTSE 100 is down by close to 5%. The oil price, having hit more than $130 a barrel just after the start of the Ukraine war, was recently trading at under $90 a barrel. 

Shell expects a drop in oil refining profit of between $1 billion and $1.4 billion for the third quarter compared to the second quarter, with the indicative margin of $15 per barrel (/bbl) contrasting with $28/bbl in Q2. 

The indicative margin for its chemicals business had retreated to a negative $27 per tonne versus a positive $86 in the second quarter in the wake of a slump in demand for plastics. That is expected to lower profit by between $300 million and $600 million compared to the prior quarter. 

Broker UBS summarised the performance as weaker than expected, although reiterated its ‘buy’ stance on the shares post the update.

ii view:

In 2021, Royal Dutch Shell changed its name to Shell. The oil major has interests in exploration and production, refining and marketing, and petrochemicals. Its serves more than 30 million customers at around 46,000 retail service stations every day. Like rivals such as TotalEnergies SE (EURONEXT:TTE), Shell is now investing in building and expanding its Renewables and Energy Solutions business given climate change concerns.  

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For investors, concerns regarding a potential global recession and its impact on oil demand cannot be ignored. A UK government windfall tax has been implemented as energy costs hit consumers hard, with potential for further increases in future, while tackling climate change issues remains a pressing need for both the industry and governments globally.

On the upside, an ending of pandemic lockdowns in China could boost demand, and a potential cut in oil production from OPEC+ should also assist the oil price, while group debt has been on a downward trajectory. What's more, the shares sit on a relatively attractive  estimated dividend yield of close to 4%, despite cutting the payout because of the pandemic, the first cut since the Second War World due to. 

On balance, and while some caution looks sensible given recession fears, Shell is a leader in a key global industry that generates good income for shareholders, meaning it will still find a place in many investor portfolios. 

Positives: 

• Geographically diverse operations
• A focus on shareholder returns

Negatives:

• Highly uncertain economic outlook
• The weather can raise operational challenges

The average rating of stock market analysts:

Strong buy