(May 7): Shell plc reported stronger-than-expected first-quarter earnings as the Iran war boosted trading profits and energy prices, outweighing declines in oil and gas production from the conflict.
Adjusted net income rose to US$6.92 billion ($8.76 billion), the London-based oil major said in a statement. That beat the US$6.1 billion median estimate of analysts compiled by Bloomberg, as surging oil and gas prices lifted profits to their highest level in two years.
Shell, which recently announced the acquisition of Canadian oil and gas producer ARC Resources Ltd — its biggest transaction under the tenure of chief executive officer Wael Sawan — cut its quarterly share buy-back and raised its dividend. The shares fell, though the move was in line with that of European peers as oil prices declined.
The war has damaged assets, roiled energy markets and choked off energy flows through the Strait of Hormuz and caused sharp price wings — conditions that normally favour larger commodity merchants. Vitol Group and Trafigura Group, the biggest independent oil traders, reaped a profit bonanza in the first three months of this year. Shell said its trading profits were boosted by the conflict, helping it to overcome a 10% hit to oil and gas production caused by disruptions in Qatar.
Total production fell about 4% from the prior period. The impact is set to linger, with second-quarter volumes expected to decline further amid continued constrains in the region and overall maintenance across Shell’s portfolio.
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The ARC acquisition is contributing to an increase in capital spending plans this year and part of a broader effort to deepen its upstream reserves as geopolitical turmoil reshapes global energy flows. The buy-back was cut to US$3 billion from US$3.5 billion in an effort to reallocate capital to the balance sheet, chief financial officer Sinead Gorman told journalists on a call on Thursday. Shell increased its dividend 5%, maintaining its policy of distributing 40% to 50% of cash flow from operations to shareholders.
Morgan Stanley analysts said the “rebalancing” of investor payouts between the cash dividend and share repurchases is a “net positive for Shell shares”.
Net debt rose to US$52.6 billion, which Shell said reflects a working capital build tied to higher prices. Gearing — the leverage ratio of net debt to equity — increased to 23.2%.
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Refining boost
Higher refining margins also supported quarterly results, even with a weaker chemicals margin environment.
Brent oil prices have increased more than 50% since the conflict began at the end of February. They retreated from war-time highs and hovered around US$99 a barrel on Thursday on signs that the US and Iran are nearing a diplomatic breakthrough.
Shell is the final oil supermajor to report quarterly earnings. Profits for BP plc and TotalEnergies SE also rose on the back of strong trading performances during the war.
US peers Exxon Mobil Corp and Chevron Corp also benefitted from elevated oil and gas prices, but experienced production outages — particularly Exxon — and negative impacts from derivatives positions.
Looking ahead, Shell now plans to spend between US$24 billion and US$26 billion this year, higher than the previously guided range of US$20 billion to US$22 billion. Shell said that increase includes about US$4 billion related to the ARC acquisition.
Qatari volumes
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Shell’s output in Qatar is offline since the Gulf nation has no export alternative to the Strait of Hormuz, which has been effectively shut. CFO Gorman said the resumption of Qatari volumes will take weeks once the waterway is reopened to safe passage for commercial vessels.
Once it’s considered safe, the backlog of ships waiting in the Gulf to transit Hormuz will take a couple weeks to flow out to the open seas, Gorman said on a call with journalists on Thursday. After that, Shell’s assets that are not under repair will restart production.
Pearl, the world’s largest gas-to-liquids plant which Shell operates in Qatar, will only have one of its two processing units available for production. The second one was struck by a missile and is expected to take roughly a year to fix. Pearl has the capacity to produce 140,000 barrels of oil equivalent per day.
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