Shell makes ‘obscene’ $9.65bn Q1 profit; US banking jitters hit markets

Kamis, 04 Mei 2023

Shell makes ‘obscene’ $9.65bn Q1 profit; US banking jitters hit markets – business live - The Guardian

From 2h ago

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Oil giant Shell has racked up earnings of $9.65bn (£7.66bn) for the first three months of this year, beating forecasts, as energy producers continue to post eye-watering profits.

Shell’s first quarter adjusted earnings are higher than the $9.13bn it made in the first quarter of 2022 – when oil and gas prices surged after the invasion of Ukraine.

But, profits are lower than the $9.8bn it made in the final quarter of last year, following the recent drop in oil and gas prices from their highs last summer.

Shell says it benefitted from “improved operational performance, lower underlying opex and better results in Chemicals & Products driven by trading & optimisation offsetting the impact of lower oil and gas prices, and higher tax compared with Q4 2022”.

Shell plans to funnel billions of these profits back to shareholders, through a new $4bn share buyback programme announced this morning.

That’s on top of total shareholder distributions of $6.3bn in the first quarter of the year, including an earlier $4bn buyback programme.

This comes on top of a blowout 2022 for Shell. Last year, it made one of the largest profits in UK corporate history, at $40bn (£32bn).

Rival oil giant BP has also made a profitable start to 2023. On Tuesday, BP reported underlying profits of $5bn (£4bn) in the first three months of the year, beating analysts’ forecasts of $4.3bn.

That was BP’s second-best results for the first quarter it has notched up since 2012, when it made $4.7bn, behind last year’s $6.2bn.

Also coming up today

The European Central Bank could raise interest rates again today, as it continues to battle inflation.

Ipek Ozkardeskaya, senior analyst at Swissquote, says:

The strong decline in bank lending – as a result of bank stress, and signs of slowing inflation – despite last month’s rally in energy prices, hint that a 25bp hike could be more appropriate in Eurozone this week than a 50bp hike.

This being said, ECB Chief Christine Lagarde will certainly not announce the end of the rate hikes in the Eurozone. She will likely stay firm on the ECB’s determination to fight inflation, and insist that the economic data will determine the size of the upcoming ECB actions.

Last night, America’s Federal Reserve raised US interest rates to the highest level since 2007, to a 5%-5.25% range.

The Fed also hinted it could be nearing the end of its rate-hike cycle. Chair Jerome Powell told a press conference:

“There is a sense that, you know, we’re much closer to the end of this than to the beginning.”

But he warned that “future policy actions will depend on how events unfold”.

We also learn how UK and eurozone services companies fared last month, and also get the latest UK car sales data. Preliminary data suggests car sales rose 10% in April….

The agenda

7am BST: German trade balance for March
9am BST: Eurozone services PMI for April
9am BST: UK car sales for April
9.30am BST: UK mortgage approvals and credit approval data for March
9.30am BST: UK services PMI for April
1.15pm BST: European Central Bank interest rate decision
1.45pm BST: European Central Bank press conference

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UK car sales have risen for the ninth month running, as easing supply chain problems helped autuo dealers to get hold of stock.

There were 132,990 new cars registered in the UK in April, according to the latest figures from the Society of Motor Manufacturers and Traders (SMMT). That’s an 11.6% increase on April 2022, but still 17.4% below 2019’s volumes.

So far this year, car sales are 16.9% higher than in 2022, which has prompted the SMMT to lift its forecast for sales this year, for the first time since 2021.

It now expects 1.83m new vehicle to be sold, up from 1.79m predicted before, as supply chain disruption eases.

But, the SMMT has cut its forecast for growth in battery-powered electric cars, saying:

The sector is, however, less optimistic about growth in demand for BEVs, downgrading their expected 2023 market share from 19.7% to 18.4%, with high energy costs and insufficient charging infrastructure anticipated to soften demand.

Mike Hawes, SMMT chief executive, says:

The new car market is increasingly bullish, as easing supply chain pressures provide a much-needed boost.

However, the broader economic conditions and chargepoint anxiety are beginning to cast a cloud over the market’s eagerness to adopt zero emission mobility at the scale and pace needed.

To ensure all drivers can benefit from electric vehicles, we need everyone – government, local authorities, energy companies and charging providers – to accelerate their investment in the transition and bolster consumer confidence in making the switch.

We have another interest rate hike…. in Norway.

Norges Bank has just raised its policy rate by 0.25 percentage points to 3.25%.

And based on the “current assessment of the outlook and balance of risks”, the policy rate will most likely be raised further in June, Norges Bank adds.

European stock markets are losing ground this morning, as investors worry about the jitters in the US banking sector.

Last night, shares in California lender PacWest tumbled by over half, as traders worried that it could become the next victim of the banking panic.

PacWest then revealed it was looking at “all options to maximize shareholder value”, and had been approached by potential partners and investors.

After the takeover of First Republic by JP Morgan this week, PacWest is the latest midsize bank under firm pressure.

Victoria Scholar, head of investment at interactive investor, explains why:

PacWest is the latest lender to fall victim to the turmoil in the US mid-cap banking sector with worried investors either cutting their holdings or adding to short positions which has punished its share price.

PacWest has a heavy focus on commercial real estate lending, which has suffered on the back of the Fed’s aggressive rate hiking path after the longstanding punchbowl of cheap money was removed.

Neil Wilson of Markets.com says it’s “all hands to the pumps” for PacWest.

Just as Jay Powell, the chairman of the Federal Reserve, was proclaiming the US banking system was “sound and resilient”, news was breaking that another embattled midsize lender was close to the edge.

After the Fed’s decision to raise rates by 25bps, reports emerged that PacWest Bancorp was exploring “strategic options”, including a possible sale. Shares in the bank tumbled 50% after-hours to take its YTD loss to almost 72%. Shares in Western Alliance, another embattled regional lender, slumped a further 22% in after-hours trading. KBW will open lower later after sliding almost 2% yesterday.

It’s all hands to the pumps now for PACW, which issued a statement saying it is looking at “all options to maximize shareholder value”. It also stressed that deposits are OK - core customer deposits have increased since March 31^st with $28 billion in total deposits as of May 2^nd, whilst the level of insured deposits has increased from 71% to 75%. You can’t ask JPM to come to the rescue again. “I think it’s probably good policy that we don’t want the largest banks doing big acquisitions,” Powell said.

No but that is what happened because it was the ‘best’ outcome for the banking system and FDIC…unintended consequences. The quicker the Fed gets to a point of cutting rates the better for these midsize banks but there is a lot more time and likely a lot more pain before we get there.

The prospect of another hike in eurozone interest rates this lunchtime is also hitting the mood on trading floors, with the ECB expected to lift borrowing costs by at least 25 basis points later today.

In London, the FTSE 100 has dipped to a near one-month low, currently down 18 points or 0.3% to 7,770 points.

Germany’s DAX and France’s CAC indices are both down around 0.4%.

Shell made record first-quarter profits of more than $9.6bn (£7.6bn) in the first three months of this year, even as oil and gas prices tumbled from last year’s highs, our energy correspondent Jillian Ambrose reports.

The better-than-expected adjusted earnings topped its previous first-quarter profit record set last year at $9.1bn for the same period, and were well above the $7.96bn predicted by industry analysts.

Europe’s biggest oil and gas company will now offer shareholders $4bn in share buybacks over the next three months.

The Anglo-Dutch energy company said profits rose thanks to its trading teams which were able to mitigate against the falling market price for oil and gas.

Global oil prices averaged $81.7 a barrel in the first quarter of this year, according to Shell, down from $102.2 a barrel in the same period a year earlier, when Russia’s invasion of Ukraine ignited a surge in oil and gas markets.

Shell’s new chief executive, Wael Sawan, said the company had delivered “strong results and robust operational performance, against a backdrop of ongoing volatility”.

More here:

In the City, shares in Shell have jumped by 2% in early trading as investors welcome today’s financial results, and another $4bn share buyback programme.

The $9.65bn profits Shell made in January-March are a record for the first quarter of the year, my colleague Jillian Ambrose points out.

But it’s not an all-time Shell record. Nine months ago, it posted adjusted profits of $11.5bn in the second quarter of 2022, after profiting from the surge in wholesale energy prices in the Ukraine war.

Here’s Victoria Scholar, head of investment at interactive investor, on Shell’s results:

“Shell reported first quarter profit of $9.65bn, beating analysts’ expectations for $8.14bn and higher than its earnings in Q1 2022 of $9.13bn when Russia first invaded Ukraine. The oil giant kept its share buyback programme unchanged at $4 billion over the next three months.

Strong trading amid the volatile price environment in Europe and America helped Shell’s earnings outpacing analysts’ expectations and offset the impact of weaker oil and gas prices and lower refining margins. Its chemicals result also improved on the back of better margins thanks to lower utility and feedstock costs.

Unlike BP, Shell maintained its share buyback programme, returning further cash to shareholders. Over the past year though, shares in Shell are up around 5%, underperforming BP which is up over 18% until Wednesday’s close.

Sky high profits for Shell and BP have raised questions about whether oil giants, which benefitted from last year’s commodity boom following the onset of war in Ukraine, should be paying more windfall taxes to redistribute excess profits towards essential government services. The counter argument is that these profits may not endure, particularly as underlying oil prices weaken amid slowing global demand. During covid for example oil prices fell sharply, resulting in an annual loss for Shell in 2020 of almost $20 billion.”

Shell’s profits were boosted by strong earnings from its fuel trading arm, which offset the impact of lower oil and gas prices.

Lower natural gas prices in the quarter knocked profits at Shell’s giant integrated gas business down by 18%, to $4.9bn, compared with the last quarter of 2022.

But profits at its chemicals and refined products unit jumped 139% to $1.8bn, from $700m in October-December last year.

UK union leaders are calling for fresh action on energy company profits, after another quarter of bumper earnings.

Sharon Graham, Unite general secretary said:

“The scale of profiteering displayed today by Shell and earlier this week BP is one of the corporate scandals of our times. And this is practically untouched by Rishi Sunak’s so-called windfall tax.

“Actually it’s time to consider something way beyond a windfall tax. Unite research has found that if the UK had a Norwegian tax take we would be earning at least £30bn more from the North Sea than we are now.

“Not taking any action against “Big Oil” means the profiteering plundering will continue without end.”

And TUC General Secretary Paul Nowak says:

“These sky-high profits beg the question – will the government ever have the backbone to tax the energy giants properly?

“While families across Britain have struggled to heat their homes, Shell have enjoyed a record cash bonanza.

“Our energy market is fundamentally broken. Struggling households shouldn’t be lining the pockets of shareholders and fat cat CEOs.

“We could all have lower bills if government taxed excessive profits, introduced a social tariff and created public ownership of new clean power.

“It’s time to end the energy racket.”

Shell’s $9.6bn profits for the first three months of this year are ‘obscene’, says Charlie Kronick, senior climate advisor at Greenpeace UK:

“As temperatures soar from Madrid to Mogadishu, Shell is once again posting bumper profits while promising to keep extracting fossil fuels for years to come.

Millions around the world are already feeling the effects of the climate crisis and it’s those who did the least to cause it who are paying the heaviest price.

“It’s time for the oil giants to start feeling the heat. The UK government should stop issuing new oil and gas licences and force Shell and the rest of the industry to start using their obscene profits to pay for the damage that their fossil fuel habit is causing to lives and livelihoods around the world.”

Shell’s latest whopping profits have sparked fresh calls for a tax on share buyback schemes – which are used to return cash to shareholders.

With Shell announcing a new $4bn buyback programme this morning, Joseph Evans, researcher at IPPR, says the government must act:

“Shell’s profits soar while households suffer.

To add insult to injury, instead of using the profits productively, like investing in the green transition, they’ve decided to hand this excess cash straight to their shareholders through a £3.18bn buyback programme, adding to the £13.8bn they paid out last year.

“It is time the government finally start taxing excessive payments to shareholders. A share buyback tax could bring in crucial billions to the UK treasury every year.”

Shell’s chief executive officer, Wael Sawan, says:

“In Q1 Shell delivered strong results and robust operational performance, against a backdrop of ongoing volatility, while continuing to provide vital supplies of secure energy.

We will commence a $4bn share buyback programme for the next three months as part of our commitment to deliver attractive shareholder returns.”