Shell's natural gas trading business is the key to the company's record-breaking profits in recent times.
According to Zhītōng Finance and Economics APP, due to seasonal changes in the market and continued weakness in energy prices, the natural gas trading business profit of European energy giant Shell (SHEL.US) in the second quarter may decline significantly. Due to oil field maintenance processes, the total production of oil and gas is also expected to decrease compared to the first three months of this year, and the company's chemical business is expected to incur losses. Shell stated in a recent statement prior to the announcement of comprehensive performance later this month.
Last year, in the case of fluctuating natural gas prices in Europe but overall at a high level, natural gas trading helped Shell achieve record profits, contributing a quarter of the overall profits. This strong performance continued into this year, helping the company achieve its best-ever first-quarter performance, but the following months have been less favorable for the company.
Shell stated in the statement that due to seasonal factors and reduced optimization opportunities, the profit of this division is expected to be significantly lower than the strong performance in the first quarter; the performance of this division is expected to recover to the average level between 2021 and 2022. The energy giant stated that the production in the second quarter is expected to be between 950 - 990kboe/d in its integrated gas division, while it was 970 kboe/d in the first quarter.
Biraj Borkhataria, an analyst at the European branch of the Royal Bank of Canada (RBC), said that after achieving excellent performance in the past few quarters, it can be said that the weak performance of the trading business is expected. He wrote in a report: "Overall, we believe that this statement is leaning towards neutrality, as most operating indicators appear to be in line with market expectations."
Borkhataria said that Shell has given guidance of $2 billion to $6 billion in operating capital gains, which should help reduce net debt this quarter given the weak macroeconomic conditions. Regarding share buybacks, he said: "This should in turn give investors confidence in the leverage trajectory and Shell's statement of at least $5 billion in buybacks in the second half of 2023." He added that the Royal Bank of Canada expects buybacks to be $6 billion. The bank maintains an "outperform" rating on Shell.
US oil and gas giant ExxonMobil has issued a similar warning
ExxonMobil, the US counterpart of Shell, is also expected to have relatively weak performance in the second quarter. The oil and gas giant stated the day before Shell's performance warning that due to the decline in natural gas prices and the decrease in refining business profit margins, profits in the second quarter are expected to decrease by about $4 billion compared to the first quarter of this year. This American oil giant is seeking to establish its own trading business to compete with European oil and gas giants such as Shell.
Regarding the performance expectations of ExxonMobil, Biraj Borkhataria from RBC stated that the decline in earnings of these two divisions may reduce ExxonMobil's net profit to around $7.5 billion, far below the market's current expectation of $9.43 billion. With global interest rates rising and commodity prices weakening, the profit levels of major oil and gas companies are declining from last year's record levels. Investors will carefully study second-quarter performance and closely monitor whether executives in the energy industry can fulfill their promises by returning billions of dollars to shareholders through buybacks and dividends.
Statistics from investment firm Yardeni show that analysts generally expect the energy sector of the S&P 500 index to see a decrease in earnings growth per share of -25.6% for the full year 2023, ranking last among all sectors of the S&P 500 index and with expectations that it may be continuously revised downward. Therefore, it can be seen that after experiencing a year of overall unprecedented profits in 2022, analysts expect the energy industry to face significant downward pressure on profits this year.