Falling natural gas prices sees Shell caught in a trap

Royal Dutch Shell fell into the same earnings trap as many of its peers, reporting second-quarter earnings that were well short of analysts' expectations, as natural gas prices slumped.

Shell is the last big oil company in Europe to report earnings this quarter, rounding out a generally weaker picture for the industry. Eni, Total and Equinor reported lower-than-expected profit due to falling energy prices, although BP surpassed even the highest analyst estimate as its production jumped.

The Anglo-Dutch company is far more focused on natural gas than its peers, accounting for about a quarter of all the world's traded liquefied natural gas volumes annually. While this division has helped generate record volumes of cash at Shell in recent quarters, a global oversupply has caused prices to slump.

Profit in Shell’s integrated gas division was down 25 per cent, but earnings were lower across all of its businesses, including upstream oil and gas production, and refining and chemicals. Despite the big profit miss, cash flow – a measure of financial performance closely watched by analysts – was actually up, both from the previous quarter and a year earlier.

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"We have delivered good cash flow performance, despite earnings volatility," chief executive Ben van Beurden said in a statement on Thursday. The second quarter saw "challenging macroeconomic conditions in refining and chemicals as well as lower gas prices".

Recent volatility

Adjusted net income was $3.46 billion, down 26 per cent from a year earlier and well below even the lowest analyst estimate. That’s the biggest earnings miss since 2016, according to data compiled by Bloomberg, and comes after a quarter in which Shell comfortably exceeded expectations, underscoring the recent volatility in the company’s earnings.

Cash flow from operations, a key measure for investors as Shell undertakes a $25 billion share-buyback programme, rose 16 per cent from a year earlier to $11.03 billion. The figure was buoyed by a positive $600 million working capital movement.

Total oil and gas output increased 4 per cent to 3.58 million barrels of oil equivalent a day. – Bloomberg