Will Lower Refining Margins Dent Shell (SHEL) Q3 Earnings?

Shell plc SHEL is set to release third-quarter results on Oct 27. The current Zacks Consensus Estimate for the to-be-reported quarter is a profit of $3.18 per share.

Let’s delve into the factors that might have influenced the integrated energy behemoth’s results in the September quarter. But it’s worth taking a look at SHEL’s previous-quarter performance first.

Highlights of Q2 Earnings & Surprise History

In the last reported quarter, Europe’s largest oil company beat the consensus mark on higher commodity prices and refining margins. SHEL had reported earnings per ADS (on a current cost of supplies basis, excluding items — the market’s preferred measure) — of $3.04, above the Zacks Consensus Estimate of $2.91.

Shell beat the Zacks Consensus Estimate for earnings thrice in the last four quarters and missed in the other, resulting in an earnings surprise of 2.4%, on average. This is depicted in the graph below:

Shell PLC Unsponsored ADR Price and EPS Surprise

Shell PLC Unsponsored ADR Price and EPS Surprise

Shell PLC Unsponsored ADR price-eps-surprise | Shell PLC Unsponsored ADR Quote

 

Factors to Consider

Earlier this month, Shell released a preliminary report for the July-September period, which said that its third-quarter profits may bear the brunt of extreme volatility and tumbling refining margins. While extreme market volatility meant that the Integrated Gas division may have contributed lower to earnings, the moderation of refining margins from their spectacular levels earlier in the year is likely to have affected the Chemicals & Products unit.

Now, let’s dig into some other segment-wise selected items from that release.

Upstream

According to the latest update, Shell’s upstream production fell 13.5% on a year-over-year basis in the third quarter of 2022 at the midpoint of the guidance. The supermajor has estimated its output in the range of 1,750-1,850 MBOE/d compared to 2,081 MBOE/d a year ago and 1,917 MBOE/d in the second quarter of 2022. Tax charges are expected to hurt earnings in the range of $3.4-4 billion. Meanwhile, Shell sees the share of profit of joint ventures and associates to swell by $500-$700 million from storage transfer gains. Segment profit is also likely to include non-cash one-off gains between $800 million and $1 billion.

Integrated Gas

Shell’s LNG liquefaction volumes are expected in the range of 6.9-7.5 million tons, which translate into a deterioration of around 2.6% year over year and 6% sequentially. Shell’s integrated gas production is expected to decrease to the range of 890,000-940,000 barrels of oil equivalent per day (BOE/d) or 915,000 BOE/d at the midpoint. It was 938,000 BOE/d in the third quarter of 2021 and 944,000 BOE/d in the June quarter. Per the company, third-quarter trading and optimization results in its integrated gas unit will be “significantly lower compared to the second quarter 2022” due to seasonality and market volatility.

Marketing

The midpoint of management’s marketing sales volume guidance equates to 2.55 million barrels per day, higher than the 2.515 achieved in the second quarter of 2022. Overall, segment profits are expected to be above second-quarter levels, while indicating operating expenses between $2 billion and $2.2 billion.

Chemicals & Products

The company fears that a drop in refining profitability is expected to bring down adjusted EBITDA from their second-quarter levels. As projected by Shell, the refining margin should considerably weaken in the third quarter, with the metric plunging 46% sequentially. The decrease would hurt product earnings by $1.2 billion at the midpoint of SHEL’s estimates. Similarly, negative margins in Shell’s chemicals-refining operations could take away $300 million to $600 million from third-quarter earnings, the company said. Shell also forecast refinery utilization of 86-90%, operating expense of 2.7-3.1 billion and chemicals manufacturing plant utilization of 75-79%.

Renewables and Energy Solutions

The adjusted bottom line of this segment is expected to hover between a loss of $300 million and a profit of $300 million.

 

What Does Our Model Say?

The proven Zacks model does not conclusively show that Shell is likely to beat estimates in the third quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of beating estimates. But that’s not the case here.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, for this company is -9.50%.

Zacks Rank: Shell currently carries a Zacks Rank #2.

Stocks to Consider

While an earnings beat looks uncertain for Shell, here are some firms from the energy space that you may want to consider on the basis of our model:

Murphy USA MUSA has an Earnings ESP of +12.68% and a Zacks Rank #1. The firm is scheduled to release earnings on Oct 26.

You can see the complete list of today’s Zacks #1 Rank stocks here.

For 2022, Murphy USA has a projected earnings growth rate of 69.6%. Valued at around $6.6 billion, MUSA has gained 59.9% in a year.

PBF Energy PBF has an Earnings ESP of +10.30% and a Zacks Rank #2. The firm is scheduled to release earnings on Oct 27.

PBF topped the Zacks Consensus Estimate by an average of 78% in the trailing four quarters, including a 43.8% beat in Q2. PBF has gained 180.9% in a year.

Oceaneering International OII has an Earnings ESP of +50% and a Zacks Rank #2. The firm is scheduled to release earnings on Oct 26.

The Zacks Consensus Estimate for OII’s 2022 earnings has been revised 33.3% upward over the past 60 days. Valued at around $966.5 million, Oceaneering International has lost 38.1% in a year.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Oceaneering International, Inc. (OII) : Free Stock Analysis Report
 
Murphy USA Inc. (MUSA) : Free Stock Analysis Report
 
PBF Energy Inc. (PBF) : Free Stock Analysis Report
 
Shell PLC Unsponsored ADR (SHEL) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research