Royal Dutch Shell Plc shares swung GBP4.5bn in value in Thursday morning’s deals – opening down about 2% before rebounding to a 1% gain – as traders tried to figure out how much money the oil firm is actually making.
There’s little subtlety in energy markets at present. Its clear this is a lucrative time to be a producer of oil and gas, even if you’re also supposed to be transitioning away from hydrocarbons into ‘net-zero’ and renewable energy.
But, how much is Shell benefitting from the currently soaring prices?
In business a few facts are obvious, others need helpful context to understand, some need calculation, but, some aren’t facts at all and are instead stated as ‘indicative guidance’.
Investors will have to wait for actual results and actual reports of revenue, cashflows and earnings.
In the meantime, though it is possible to extrapolate from Shell’s updated ‘price and margin sensitivities’ guidance, provided in today’s third-quarter statement.
The guidance says that for every US$10 dollars that the Brent oil price goes up, Shell makes an extra US$3bn of earnings (US$4bn of cashflow) in its upstream business, whilst the integrated gas business at the same time makes an extra US$1.1bn.
In the gas market, Shell says it makes an extra US$350mln of earnings (US$450mln cashflow) for every additional dollar that the American Henry Hub benchmark rises, and it makes US$150mln earnings (US$200mln cashflow) for every US$1 that the European gas price benchmark (TTF) rises.
So that’s simple enough, right?
Brent is today trading just above US$80 per barrel, up from around US$46 a year ago, which means based on Shell’s guidance it is earning approximately US$14bn more across upstream and integrated gas business units since this time last year.
With a spot price of about US$6.37 presently Henry Hub is up from US$1.86 a year ago, so roughly that’s US$1.5bn of earnings,
The European import price of gas is at US$22.80 from around US$4.80 a year ago, which would mean an extra US$2.7bn of earnings according to Shell’s ‘price sensitivity’ indicators.
For its refinery business, Shell said it earns an extra US$500mln for every US$1 increase in its refinery margins, which would equate to an additional US$2.44bn with the indicative third-quarter margin marked at US$5.70 per barrel up from US$1.59 in the fourth quarter of 2020.
All told, a back of a cigarette packet sum would say that Shell is earning close to US$20bn more than a year ago, because of the rise in oil and gas prices.
Such a calculation of course comes with 101 caveats, the least of which says that for every case the guidance provided by Shell were rule-of-thumb indications.
Beyond that is to also acknowledge that the actual marketplace is extremely dynamic and variable, particularly when it comes gas and the practically colloquial regionality of gas prices which can result in very different pricing structures in one geography compared to another. Then there’s the not insignificant matters of supply chain disruption and the inflating cost of most operations.
To sum up, the findings are insightful if unsurprising.
Shell, one of the biggest producers of fuel in the world, is making an awful lot more money because the prices of its primary products have gone up sharply.
