Shell PLC endured a tough 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 business.
Broker UBS said the trading update points to a weaker third quarter than it expected primarily driven by results from its Integrated Gas (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 890-940kboed, in line with previous guidance UBS said, while upstream production was slightly higher at 1,750-1,850kboed against previous guidance of 1,750-1,950kboe/d bringing total production to 2,640-2,790kboed below the broker’s estimate of 2,896kboed.
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 -$300mln and $300mln, a wide range and compared to the broker’s forecast of $270mln.
The Downstream division was also weaker than expected, UBS said, with Shell expecting an earnings decrease of $1.0-1.4bn from the previous quarter due to lower refining margins, as the indicative refining margin of $15/bbl in the third quarter fell from $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 -$27/tonne vs $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 $300-$600mln on EBITDA.
Combined, UBS calculated this means a decrease of $1.3-2.0bn quarter on quarter compared to the consensus for a decrease of $0.4bn.
The working capital outflow of $2.5bn as of end August was also above consensus forecasts of $1.8bn, the broker said.
Nevertheless UBS kept its buy rating on Shell with a price target of 2,650p.