Shell warns of hit to earnings from Hurricane Ida, but sees cash boost

Royal Dutch Shell on Thursday said the impact of Hurricane Ida would hit earnings by $400m, but expected a third quarter cash flow to be boost from power and gas trading as prices surged.

Ida knocked out some of the company's Gulf of Mexico upstream operations in August, which led to a fall in production, compounded by oil prices jumping to $80 a barrel.

A squeeze on supply coupled with a post-pandemic surge in demand has seen gas and electricity prices rise around the world as producers struggle to catch up.

In a trading update ahead of third quarter results, Shell, the world’s biggest seller of liquefied natural gas, said liquefaction in the quarter was expected to be 7 - 7.5m tonnes due to feedgas constraints and additional maintenance.

Cash flow was expected to be “significantly impacted by large variation margin inflows on the back of the prevailing gas and electricity price environment” Shell said, adding that inflows were expected to be higher than the second quarter.

Uptream oil and gas production fell in the quarter to between 2.025m - 2.1m barrels of oil equivalent per day (boed) due a 90,000 boed fall in production after Hurricane Ida.

Refining indicative margin was lifted to around $5.70 a barrel, up from $4.17/bbl in second quarter.

In gas production, the company said it expects to produce between 890,000 - 950,000 boed in the third quarter, adding that earnings are “not expected to be significantly impacted by the prevailing strong gas price environment”. However, Shell said it was expecting a large cash flow bump thanks to high prices.

Shell said that over the full year, every $10 increase in the cost of Brent crude adds around $3bn to upstream earnings and $1.1bn to integrated gas earnings.

The company in July revealed its adjusted earnings raced more than eight times higher in the second quarter, to reached a little over $5.5bn dur to steep rises in the cost of crude.

AJ Bell investment director Russ Mould said Shell’s decision to pivot towards natural gas over the last decade "has left it well positioned for the current market conditions".

"This most notably manifested itself in the blockbuster acquisition of BG Group which helped make it a leading player in the liquefied natural gas market. The unpredictability of renewables suggests there may be a role for gas as countries look to wean themselves off higher emitting fuels like oil and coal.," he said.

“It’s not all good news for the company, Hurricane Ida and the associated damage and disruption to its US operations will lead to a sizeable hit. Longer term Shell still faces the ticking clock of reaching net zero amid mounting shareholder and regulatory pressure.”