Shell Profit Leans on Record Refining Margins: Rapid Earnings Reaction

Shell's third-quarter income attributable to shareholders reached $12.1 billion, with adjusted earnings climbing to $10.8 billion from $9.8 billion in the previous quarter. This significant gain, reported this morning, pushed shares up around 3%. The primary driver behind this strong performance was the Chemicals & Products segment, where refining margins set a record high.

Throughout the quarter, every other segment combined saw only modest growth, indicating a relatively flat performance. Refiners thrive on refining margin, the gap between the cost of crude oil and the revenue generated from fuels. When this gap widened sharply, a substantial portion of the increase translated directly into higher profits, as other costs remained relatively unchanged.

As a result, despite processing lower quantities of crude than in Q2, the Products segment still managed to achieve adjusted earnings of $3.8 billion.

Chemicals earned approximately $0.1 billion. However, it's worth noting that record-high refining margins are not sustainable in the long run. Upstream earnings took a hit due to falling oil and liquids prices, along with higher well write-offs. Meanwhile, Marketing suffered from weaker Mobility (fuel retail) margins. Integrated Gas, on the other hand, benefited from higher gas and liquefied natural gas prices.

The recent acquisition of ARC Resources, completed on September 2, is expected to significantly boost production in the fourth quarter. Additionally, cash flow was bolstered by a $3.4 billion inflow from derivatives, partially offset by a payment for German emissions certificates, which typically occurs in the fourth quarter.

Despite the strong performance, analysts caution that these results should not be viewed as a new baseline. Investors should closely monitor whether the Products segment's earnings can maintain their elevated levels if refining margins begin to fall from their record high. Furthermore, investors should prepare for a non-cash loss estimated at $6.4 billion, which will stem from derecognizing a Netherlands defined benefit plan. This event is expected to impact reported income.