Shell – Profits Start To Shrink, But Shareholder Rewards Boosted

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Shell PLC (LON:SHEL)’s third quarter underlying cash profits (EBITDA) fell 7% from the previous quarter to $21.5bn. This was mainly due to a 17% decline in Integrated Gas as supply constraints and operational issues offset higher prices.

Reduced margins in chemicals and refining and a 7% increase in operating expenses also contributed to the decline. The bright spot was upstream which saw underlying cash profits rise 12%, reflecting an increasing proportion of higher-value Deep Water barrels sold.

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Q3 2022 hedge fund letters, conferences and more


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The group’s retail network (marketing), saw a 4% rise in underlying cash profits as increased usage of the group’s EV charging stations partly offset weakness elsewhere.

The  Renewables and Energy Solutions business remained in the red including the value of the group’s commodity hedges. Excluding these, cash profits were $530m, down 48% from the previous quarter due to price volatility and rising operating expenses.

Free cash flow was down from $12.4bn in the second quarter to $7.5bn, as Shell increased its holding of European gas inventories.

Net debt rose slightly on a quarterly basis due to reduced cashflow and the debt taking on in the Sprng Energy acquisition. However it was down from $57.5bn a year ago to $48.3bn.

The group announced a $4bn buyback programme and proposed a 15% increase for the fourth quarter dividend.

The shares were up 1.5% following the announcement

Shell's Earnings

“With oil prices down from their triple-digit highs this summer, it was inevitable to see big oil’s profits start to thin. However nearly $7bn in profits for the quarter is nothing to sneeze at, and is a far cry from the losses Shell suffered last year.

Although the group isn’t printing money at record pace anymore, oil prices are still elevated by historical standards and that means Shell has more than enough to continue boosting shareholder rewards.

Notably, apart from modest contributions from its retail network, Shell’s oil and gas exploration and extraction business is bringing home most of the bacon. This is to be expected, particularly in an environment where oil prices are elevated.

Eventually we’d like to see cleaner parts of the business start to make up a bigger slice of the pie. The renewables business has gotten a lot of attention lately given the incoming CEO Wael Sawan was its head, but a quarter-on-quarter decline in profits suggests there’s still a long way to go before this part of the business will make it into the black.

No word yet on how Sawan’s presence will impact the group’s strategy going forward, but that’s something we’d expect to hear more about in the new year once the transition is complete.”

Article by Laura Hoy, Equity Analyst at Hargreaves Lansdown