Shell flags up refining boost, impairment reversals

Shell expects a sharp increase in refining margins to boost downstream profit when it reports its second-quarter financial results later this month, while changes to its oil price outlook will reverse up to $4.5bn of previous impairment charges.

In an update ahead of its results on 28 July, the company said its indicative refining margin jumped to $28.04/bl in April-June from $10.23/bl in the previous three months. It expects the increase "to have a positive impact" of $800mn-1.2bn on its refining results in the second quarter. Earnings from oil trading are expected to be "strong", albeit lower than the first quarter, Shell said.

In its Integrated Gas segment, Shell expects production to come in at 930,000-980,000 b/d of oil equivalent (boe/d), compared with 896,000 boe/d in the first quarter and 938,000 boe/d in the second quarter of 2021. Liquefaction volumes for the second quarter are expected to be 7.4mn-8mn t, compared with 8mn t in the previous three months, reflecting the fact that Shell is no longer recognising volumes from the Sakhalin 2 project in Russia. It expects the derecognition to cause a $300mn-350mn hit to its integrated gas results.

In the Upstream division, the company expects to report oil and gas production of 1.85mn-1.95mn boe/d, down from 2.03mn boe/d in the first quarter and 2.26mn boe/d in the second quarter of last year, with the decline caused by increased scheduled maintenance.

Shell has revised its commodity price outlook to reflect "the current macroeconomic environment as well as updated energy market demand and supply fundamentals", it said. It now assumes a Brent crude price of $80/bl in 2023, $70/bl in 2024-25 and $65/bl in the long term. This will lead to a reversal of $3.5bn-4.5bn of previous asset impairments on a post-tax basis.

Analysts at RBC Capital Markets said they view Shell's statement as neutral given a number of offsetting impacts to the results, "with the main uncertainty being around the magnitude of working capital outflows".

Shell said its second-quarter operating cash flow was already hit by $6bn of working capital outflows by the end of May and there could be further outflows recorded for June.

By Jon Mainwaring