Where next for Shell’s share price if record earnings are over?

 

HAS Shell’s record earnings run finally hit the buffers? The oil giant has had quarter after quarter of back-to-back record-breaking earnings - and faced increasingly vocal calls for a windfall tax on the oil and gas giants amid a cost-of-living crisis - but next week’s third quarter update may show the bull-run has already come to an end.

In an update ahead of next week’s third-quarter report, oil giant Shell (SHEL) has already signalled that its record of ever-higher earnings may well have come to an end. Europe’s largest oil and gas company said that in the three months to the end of September it had seen margins at its refining business fall and it expects them to come in at $15 a barrel, compared to $28 a barrel in the previous quarter. If that’s the case, adjusted earnings for July to September will fall by $1bn to $1.4bn compared to the previous three months.

But the bad news doesn’t end there. Margins at Shell’s chemicals unit have also fallen, from $86 a tonne in the last quarter to an expected minus $27 a tonne, after a fall in global demand for plastics. Meanwhile, the world’s biggest trader of liquefied natural gas said earnings from its integrated gas business were also expected to be significantly lower. It put that down to lower seasonal demand and the impact of a “volatile and dislocated” market.

For investors this will be a bitter pill to swallow. Shell had been riding high. In July, reported quarterly earnings of $11.5bn broke the record $9.1bn recorded in the first three months of the year and more than doubled the $5.5bn achieved in the same period a year earlier. Investors were rewarded with a $6bn share buyback scheme that came on top of the $8.5bn of buybacks Shell had already completed in the first half of the year.

The big question investors will be wanting an answer to is whether this signals the end of the run of record profits, or it’s a blip. However, if lower refining and chemicals margins and weaker gas trading become the norm, then we can expect to see earnings continue to take a knock and what then for the share price and the all-important dividends that investors have come to rely on?

There will also be interest in anything Shell can share on its renewable energy plans. Rival BP’s (BP) planned $4.1bn purchase of a US-listed biogas producer is its largest-ever low-carbon energy acquisition and suggests it wants to accelerate its push into greener fuels. Shell’s recent purchase of a Nigerian renewable energy provider marks a move into Africa and follows moves into India and the US in the past 12 months. While Shell’s history with Nigeria is long and complicated, having been the first company to find oil there in 1956, it is a potentially huge market and this acquisition could position Shell very well to roll out renewable energy on a continent on which about 43% of the population lack access to electricity.

Shell’s Q3 trading update is due out on Thursday (27 October).

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