A couple of days after Shell (SHEL) announced a frontier discovery in an offshore Mediterranean basin, the UK oil major revealed stronger than expected second-quarter (Q2) profits. <\/p>\n
Cue howls of outrage from the purple hair brigade. Shareholders, on the other hand, will be pleased to receive another quarterly payout of $0.3906 a share, along with news of a fresh $3bn (\u00a32.3bn) share buyback, although they would do well to monitor the group\u2019s LNG output.\u00a0<\/p>\n
The group posted adjusted earnings of $9.84bn for Q2, well ahead of FactSet consensus, alongside free cash flow of $17.5bn, set against $2.93bn in the first quarter of the year. Little wonder management is in a giving mood.\u00a0<\/p>\n
Events in the Strait of Hormuz continue to dominate the headlines, although you get the impression that oil traders may have become jaded by the whole affair. The ongoing ructions have certainly vindicated the expansion of Shell\u2019s energy trading activities, not least because it would probably be easier to list all the times when the Middle East was not experiencing some form of turmoil. \u00a0<\/p>\n
Adjusted quarterly returns have been bolstered by higher realised prices and favourable tax movements, but they also found support through Shell\u2019s LNG trading and optimisation activities. There was a time when energy price volatility might have weighed on financial performance, but geopolitical conflict and energy price swings can \u2014 and do \u2014 increasingly work in the group\u2019s favour given its ability to redirect supplies and capture arbitrage in the process.\u00a0<\/p>\n
So while the group had to contend with higher depreciation, depletion and amortisation expenses, it was able to exploit the widening spread between Brent crude prices and those of West Texas Intermediate, and its positive impact on refining and chemicals margins. These helped to offset lower lubricant margins and lower export volumes out of Qatar. Quarterly LNG sales volumes slipped by 6.3 per cent to 18mn tonnes, and any further weakness here may present a problem going forward. Profitability was also constrained to a degree due to one-off impacts linked to fair value accounting of commodity derivatives.\u00a0<\/p>\n
Consensus estimates point to EPS of 368\u00a2, falling to 325\u00a2 in 2027.\u00a0<\/p>\n
The shares trade in-line with European peers on an enterprise\/Ebitda basis, although the rating is adrift of the US majors. With an implied dividend yield heading towards 3.5 per cent, we think the income case is more compelling given the surge in free cash flow, which also fed through to a sizeable reduction in net debt, down by $10.8bn to $41.8bn. Hold.<\/p>\n