Shell Sees $1 Billion Gain in Refining on Record Fuel Prices

Shell station
Patrick T. Fallon/Bloomberg News

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Shell Plc said soaring margins from fuel production may have added more than $1 billion to the earnings of its refining business last quarter, when gasoline prices broke records in several countries.

The trading update from the London-based energy giant is the first indicator of just how much cash was flowing into the coffers of major oil companies due to the inflationary surge in the price of gasoline, which climbed above $5 a gallon in the U.S. for the first time.

While the rising cost of energy is strengthening the oil majors after several tough years, it risks a political backlash. President Joe Biden has directly called on fuel retailers to cut prices and companies are facing windfall taxes in some countries.

Shell’s indicative refining margin jumped to $28.04 a barrel in the second quarter from $10.23 in the first three months of the year, the company said in a statement July 7. That’s expected to have a positive impact of $800 million to $1.2 billion on the results of its products division, compared with the prior period.

Shell’s shares advanced as much as 2.5%, and traded up 1.2% at 1,997.2 pence as of 9:36 a.m. in London.

Still, analysts at RBC Europe Ltd. saw the update as “neutral,” citing uncertainty around the “magnitude of working capital outflows.” In May, Shell said that it would be hit by around $7.4 billion of working capital movements.

Oil prices have jumped 30% this year as the war in Ukraine stokes supply concerns. Having ramped up its long-term price assumptions, Shell now expects to reverse previous writedowns on asset values by $3.5 billion to $4.5 billion.

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The company took a $3.9 billion impairment in the first quarter, stemming from its planned exit from ventures in Russia. It will take an additional hit of as much as $350 million from the loss of LNG volumes from the Russian Sakhalin-2 project, it said July 7.

Trading and optimization results from Shell’s sprawling integrated gas unit fell from the previous quarter, when the business benefited from “exceptional” trading opportunities. The renewables and energy solutions division is expected to report adjusted earnings of $400 million to $900 million for the second quarter amid an “exceptional market environment,” the statement showed. Shell didn’t give an update on the future of its buyback program, having said it completed $8.5 billion of repurchases in the first half of the year. The company has previously signaled an acceleration in returns, saying that shareholder distributions would be in excess of 30% of operating cash flow.