Next week will see supermajors BP and Shell publish results for one of the most turbulent quarters in recent memory, as they each look to reconcile continued bumper cash flows with the write-down of Russian investments.
BP will file first with accounts due out on May 3, followed by Shell on May 5.
Both will have to reckon with the impact of their plans to exit Russian ventures and investments.
In an April 7 note updating guidance ahead of its results, Shell said the post-tax impact from the impairment, including write-downs of receivables, expected credit losses, and onerous contracts, was expected to be in the region of $4-5 billion (£3-3.8bn).
BP, however, looks set to face charges of up to $25bn (£20bn) for the offload of its near-20% stake in state-backed group Rosneft.
Ashley Kelty, oil and gas analyst at investment bank Panmure Gordon said he expected filings would show the impairments to be bigger than previously announced estimates.
“I doubt that either company will be able to adequately assess the negative impact of pulling a large chunk of their business away overnight,” he added.
“However, one positive is that it will reduce their total emissions, and potentially will have a reduction in the boe metric given that Russian production isn’t renowned for being the cleanest.
“The reduction in Russian operations and loss of reserves will also mean that the renewables operations/investments will now contribute a greater proportion of revenues, and I expect that both companies will use this as an excuse to show they are pivoting away from fossil fuels,” he opined.
‘Cash machines’
Impairments aside however, commodity prices have stayed high through the quarter on ongoing volatility, suggesting Big Oil is likely to continue its run of record cash generation.
Some forecasts expect the five supermajors – also including TotalEnergies, Exxon and Chevron – to generate around $36 billion of free cash flow for the quarter, the highest since 2008. Results for Q2 could be even higher.
Analysts at Royal Bank of Canada (RBC), estimate BP will post profits of £4bn for the quarter, while Shell will record some £6.7bn.
In an April note, Jeffries analysts described Shell as a “key winner” from current global trends, and increased its adjusted earnings estimates upwards to just below $7.7bn (£6.2bn), “driven by a strong trading contribution being partially offset by lower earnings in upstream.” Expectations for its integrated gas unit were also raised by 25%.
It lowered its full-year 2022 estimates for the supermajor by 2%, to $27.8bn, but kept forecasts for 2023 and 2024 unchanged.
Refining margins too will bolster results at both companies, who benefit from integrated operations.
In its April update, Shell suggested indicative margins for the quarter were expected to rise to $10.23/bbl – almost four times the $2.65/bbl margin reported for Q1 2021. As a result, Jeffries expects the earnings from company’s oil products division to top $1.4bn.
Explained Mr Kelty: “Margins for refined products – particularly gasoline and distillates (diesel, jet fuel and heating oil) – were already at their highest in several years coming into 2022, and have since risen, with the heating oil crack spread at nearly $41 per barrel by the end of March, nearly $20 more than average over the past five years.”
He attributed the rise rocketing price of the gas needed to operate oil refineries, which has seen some European firms cut production. This contributed to a sharp fall in distillate inventories worldwide, putting a premium on production of diesel and jet fuel.
“Consequently, I’d expect to see an uplift in the revenues from the downstream operations for both companies,” he continued.
Both supermajors are also expected to hike dividends through the year.
© PAWindfall tax
Yet energy bills are a key component of a worsening cost-of-living crisis affecting millions in the UK, and the record profits for oil, gas and energy companies will do little to stave off calls for increased taxes.
Demands for a windfall tax on oil and gas have persisted since last year. This week even Chancellor Rishi Sunak – a staunch opponent of the proposal – told internet forum Mumsnet that “nothing is off the table”.
While Mr Sunak reiterated his concerns that such a measure would discourage further investment in the UK energy sector, he also noted that if energy firms were not seen to be investing in developing Britain’s energy supplies, a windfall tax is a tool he would consider.
Other sector leaders have urged that cash flows be spent on energy transition projects, and not dividends.
Mr Kelty was more sceptical, describing the proposed tax as “simple populist political rhetoric.”
“It wouldn’t actually result in a reduction in utility bills and whether the tax would be fed back to the public is unclear.
“I would counter by asking why these same politicians were not calling for a windfall tax on pharma during the pandemic, as there were companies that made huge profits at taxpayers expense?”