Shell shares cling to gains after refining boost

Shell has joined the rush by the beleaguered oil industry toward bolstering downstream margins as a way to stem losses from the oil price collapse.

The Anglo-Dutch ‘supermajor’s first quarter profit came in 56% lower than the same quarter a year ago but it essentially said refining and trading profit saved its bottom line from a fall that could have been even deeper.

Net income could have collapsed by 70% without downstream surge

Shell said on Thursday refining and trading rose to $2.65bn in the first quarter from $1.575bn a year earlier, whilst oil and gas production earnings imploded.

The company made just $675m from its core business in Q1 having earning about $5.7 billion from oil and gas just a year ago.

This implies a group net income rout that would have approached 70% to come in around $2.25bn for the quarter, assuming refining profits had stayed level with last year.

The energetic re-focus on lower stream activities by Shell and its peers further underscores the rationale by some of them for record-breaking deals, of the kind Shell announced earlier this month for BG Group.

Shell said it would use its planned $70 billion acquisition of smaller British rival BG Group to further optimise its asset base.

Shell has already sold £2bn worth of assets so far in 2015 and has pledged a $15bn programme of cuts aimed at softening the effect of the weaker oil prices.

Shell’s earnings follow those from BP and France’s Total SA on Tuesday.

They also showed released profits that were higher than market forecasts due to ramped up refining activities, however Shell’s results differ in a key respect.

Whilst its French and British rivals chose to increase production during the year to their last quarters, Shell barely managed to keep oil pumping at the same rate.

In fact production slipped 2% to 3.2m barrels of oil equivalent per day.

Market estimates suggest adding on BG’s capacity could hike Shell production by 20%.

In many ways therefore this raises the stakes for Shell.

It needs the BG deal to happen for the sake of its upstream production market share, which the firm is probably loathe to cede to rivals for fear of the consequences when oil prices recover definitively.

At the same time, it’s already questionable whether the refining boost is sustainable.

Note that Shell’s refineries in fact processed 3% less than a year earlier—hiking downstream profits by a further 70% rise, from a flat-to-lower refining base will be a challenge.

We also need to throw in the fact that downstream earnings included a net charge of $132m, “including net impact of fair value accounting of commodity derivatives of $56 million”.

In (almost) every-day speak, that would in all probability refer to the cost of a hedge (to insure against an unexpected move in price) for the price of oil, or perhaps liquid natural gas.

Given the relatively low value it could be a fee or a small trading loss—note oil prices have edged higher so far this year.

Either way, the main point is that downstream businesses are not risk-free.

On top of overhanging risk from Shell’s offer to BG, from international antitrust negotiations that could conclude with an ultimatum for Shell to dispose of operations it would rather retain, the stock should perhaps be given a handicap—perhaps a bigger one than any supermajor.

If that’s a correct assessment, it helps explain the relatively tardy comeback from December lows of less than 10% by both the A and B classes of Shell’s stock.

Both classes are set up for considerable chart challenges from failed attempts to breach descending trend lines going back to November at least.

For the currently discounted RDSA stock, it’s therefore tempting to think a further visit to major support around 1962 could be seen at some point in the next month or so, should any further near-term attempts on 2111p not work out.

The equivalent Daily Funded Trade offered by City Index became overbought in the 1000 AM-1030 AM half-hourly interval on Thursday morning, judging by the attached stochastic-based trading system.

This implies the title will return to nearby support in this timeframe—more or less at the equivalent of 2040p.