Shell Raises Third-Quarter Refining Margin Outlook to $42 a Barrel
Key Facts
Shell raised its indicative refining margin estimate for the third quarter to $42 a barrel, compared with $24 in the second quarter, according to a company disclosure filed with the U.S. Securities and Exchange Commission on Oct. 7. The update puts improved refining activity at the forefront of the expected operating picture ahead of the results announcement, but does not establish that the company’s earnings will exceed market estimates. At the same time, Shell expects refinery utilization to fall to a range of 93% to 97%, after recording 102% in the previous quarter. The company attributed part of the pressure to low water levels on the Rhine, which affected utilization at the Rheinland refinery. Actual results are due to be published on Oct. 29, with the company cautioning that the outlook may differ from the final figures.
The expected improvement does not extend to all refining and chemicals activities: Shell expects its indicative chemicals margin to decline to $208 a ton in the third quarter, from $270 a ton in the second quarter. The comparison reflects a divergence between an improving refining margin and a declining chemicals margin, making the sector’s results dependent on the performance of both activities. The company also expects adjusted marketing earnings to be lower than in the second quarter, despite forecasting sales volumes of between 2.55 million and 2.65 million barrels a day, compared with 2.57 million barrels a day in the previous quarter. The disclosure thus indicates that strength in the refining margin does not mean earnings will improve simultaneously across business units. These figures remain operating outlooks issued ahead of the results announcement, not realized quarterly results.
In integrated gas, Shell forecast production of between 740,000 and 780,000 barrels of oil equivalent a day, compared with 631,000 in the second quarter. The outlook includes the impact of the company’s acquisition of ARC Resources, which was completed on Sept. 2. In upstream, Shell forecast production of between 1.735 million and 1.835 million barrels of oil equivalent a day, versus 1.824 million in the previous quarter. The figures put integrated gas production on a higher trajectory, while the upstream forecast range straddles the second-quarter level. The disclosure does not separate the acquisition’s impact from other operating factors in this comparison, but explicitly says it is included in the integrated gas production outlook.
Shell said the ARC deal is expected to generate double-digit returns and support long-term cash flows, while boosting free cash flow per share starting in 2027. This comes as the company expands its Canadian gas resources, while LNG Canada’s Phase 2 project took a final investment decision, according to the company’s background on the project. Shell expects commercial operations for Phase 2 to begin in the early 2030s. That timeline places the project’s operating impact beyond the third-quarter results, while the acquisition is already factored into current gas production expectations. These outlooks are no substitute for the quarterly results, which the company said may differ from the published estimates.
Shell also forecast a write-off of about $0.3 billion for exploration wells in the third quarter. For operating cash flow before working capital, it pointed to an outflow of about $2.5 billion related to the timing of payments for German emissions certificates. This item adds expected cash pressure to the quarter’s picture, alongside the substantial improvement in the refining margin. When it announced second-quarter results, the company said its operating performance had delivered very strong results during another quarter of acute disruption in global energy markets. It also announced then the start of an additional $3 billion share buyback program, as part of a policy to distribute between 40% and 50% of operating cash flow through the cycle. This background provides context for the distribution policy, while third-quarter results remain the next milestone for assessing the financial impact of the operating outlook.
Shell shares closed at $105.8 on Oct. 22, according to EL7 data. Previous closes were $106.66 on Oct. 16, $104.82 on Oct. 19, $105.54 on Oct. 20, and $105.36 on Oct. 21. These levels put the Oct. 22 close below the Oct. 16 close, but above the closes on the following three days. The share move comes ahead of the results announcement scheduled for Oct. 29, when the company will publish actual third-quarter figures. Shell stressed that its published operating outlook may differ from final results.