Shell flags a record $42-a-barrel refining margin for the third quarter

Shell said on Wednesday that its indicative refining margin reached $42 a barrel in the third quarter, up from $24 in the second and a record for the oil major's benchmark, as conflict in the Middle East upended global fuel markets.

The figure came in the quarterly update note Shell publishes a few weeks before its results, which are due on Oct. 29. It is an outlook rather than a final number, and Shell cautioned that actual results could differ. The previous high for the margin was $28.04 a barrel, set shortly after Russia's full-scale invasion of Ukraine in 2022, according to The Wall Street Journal. The new level is roughly 50% above that, by TickerGrove's calculation.

Shell also expects trading and optimisation, the business that buys, sells and moves oil, gas and fuel around its own plants and fields, to perform in line with the second quarter in both its gas and its chemicals and products divisions. The note shows Shell made $9.8 billion of adjusted earnings in the second quarter.

What lifted fuel margins

Oil prices jumped after the United States and Israel attacked Iran in late February and Tehran effectively shut the Strait of Hormuz. Fuel markets have been tight since, widening the gap between what refiners pay for crude and what they get for the fuels they make. Brent crude futures for December were up 1.1% at $101.69 a barrel early Wednesday.

Shell is not the only European producer benefiting. Equinor said on Wednesday that its downstream division, which includes energy trading, would beat its $400 million guidance for the third quarter, helped by unusually strong European refining margins.

Where the quarter looks weaker

The refining windfall comes with offsets. Shell's indicative chemicals margin fell to $208 a tonne from $270. It expects refinery utilisation of 93% to 97%, down from 102% in the second quarter, because low water on the Rhine is hampering its Rheinland refinery in Germany. Its previous outlook had been 93% to 101%.

Adjusted earnings in marketing, which includes Shell's service stations and lubricants, are expected to fall from the second quarter, and exploration well write-offs should come to about $300 million.

Cash flow will take a separate hit. Shell expects an outflow of about $2.5 billion tied to the timing of payments for emissions certificates under Germany's fuel emissions trading law, a bill it says it has historically paid in the fourth quarter.

More gas after the ARC deal

Shell raised its integrated gas production forecast to 740,000 to 780,000 barrels of oil equivalent a day, from 570,000 to 630,000, compared with 631,000 in the second quarter. The new outlook includes ARC Resources, the Canadian producer whose $16.4 billion takeover Shell completed on Sept. 2. The earlier forecast had left out volumes from ARC and from Qatar.

Liquefied natural gas volumes are expected at 7.2 million to 7.6 million tonnes, slightly below 7.7 million in the second quarter, and upstream oil and gas output at 1.74 million to 1.84 million barrels of oil equivalent a day. Shell said net debt will reflect the cash paid and debt assumed in the ARC deal, as well as higher variable payments on long-term shipping leases.

How analysts and the stock reacted

Analysts at Jefferies said they had expected a refining margin of about $32 a barrel and estimated the update could lift the consensus forecast for Shell's third-quarter net income, about $9.5 billion, by roughly 4%, according to comments compiled by MarketScreener. RBC said a month of ARC output put Shell's production guidance above consensus. ING was more cautious, saying investors may not pay much for refining profits given Shell's aim to reduce its exposure to the downstream business.

Shell shares were up 0.9% at 3,684.5 pence in London at about 5:20 a.m. Eastern time, according to cnbc.com market data. A company-compiled analyst consensus is due on Oct. 21.