Shell Q2 Earnings Preview: Can Refining Margins Save the Day?

Shell plc is poised to release its Q2 results on July 31, with consensus estimates projecting $1.13 EPS and $73.7 billion in revenue, reflecting anticipated year-over-year declines of 42.6% and 1.8% respectively. While the company faces headwinds including reduced Integrated Gas and LNG output, lower traditional drilling production due to maintenance and asset sales, and an expected loss from its chemicals division, robust refining margins, which increased to $8.90 per barrel, are expected to provide a significant offset. Despite this strength, the Zacks model indicates an uncertain outlook for an earnings beat, suggesting a mixed operational performance for the quarter.

Analysis

Shell's upcoming second-quarter results present a mixed operational picture, with significant headwinds in production and chemicals being partially offset by a robust performance in refining. The company anticipates lower output in its Integrated Gas division, with production guided to 900,000-940,000 barrels of oil equivalent per day (boe/d) and weaker gas trading results compared to Q1. Similarly, traditional drilling production is projected to decline to between 1.66-1.76 million boe/d, impacted by maintenance and the divestment of its Nigerian SPDC assets. Further pressure on the bottom line is expected from the chemicals business, which is forecast to report a loss following unplanned shutdowns at its Monaca plant. The key counterweight to these challenges is the strength in refining margins, which increased substantially to $8.90 per barrel from $6.20 in the prior quarter. Despite this downstream strength, consensus estimates reflect the broader operational difficulties, projecting a 42.6% year-over-year drop in EPS to $1.13 and a 1.8% revenue decline to $73.7 billion. The uncertainty is underscored by a neutral 0.00% Earnings ESP, suggesting an earnings beat is not a high-probability outcome.

Key Decisions for Investors

• Investors should closely evaluate the refining segment's contribution, as its significantly improved margins are the primary factor expected to mitigate the negative impact from lower production volumes and a loss-making chemicals division.
• Given the multiple headwinds from reduced gas and oil output, weaker gas trading, and operational issues in chemicals, the current consensus for a 42.6% year-over-year earnings decline appears justified, warranting a cautious stance ahead of the report.
• With a neutral earnings surprise prediction and a wide guidance range for the renewables segment, investors should be prepared for potential volatility and scrutinize the company's updated full-year outlook for any changes in strategy or performance expectations.