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Market Insights

Shell - Another Windfall For Big Oil?

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The energy sector has been the one bright spot this year. Shell and Exxon both reported bumper earnings last week. BP earnings are up next. Can they keep the big oil run going?

If you’re looking for green in 2022, there’s only been one place to go… Energy stocks have led the way. Dubbed the revenge of the old economy, the outperformance has been staggering (via Finviz):

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Shell’s quarterly results were noteworthy. The company is well on track for a record year of profits. After the first three quarters of 2022, profits hit $30.5 billion, just $500 million shy of the $31 billion posted in 2008.

Investors will be hoping history doesn’t repeat. In 2009, Shell’s profits plunged to $10 billion…

As always, there’s a strange dichotomy between supply and demand in the oil market. Fears of recession, inflation, and the slowdown in China all contribute to a weaker demand outlook, while easily accessible energy supplies are relatively scarce stoking fears that any supply disruption could push oil prices higher.

And amongst this, ‘big oil’ is operating with strong margins and doing just fine. It’s more ‘big energy’ than ‘big oil’ but the name has stuck anyway.

Still, investors liked what they saw. After the report, Shell’s share price gapped above the 200 day moving average and remained at those levels the next day too:

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Shell CEO Ben van Beurden was happy with the company performance, saying:

"We are delivering robust results at a time of ongoing volatility in global energy markets. We continue to strengthen Shell's portfolio through disciplined investment and transform the company for a low-carbon future. At the same time we are working closely with governments and customers to address their short and long-term energy needs."

The company also continues to reward shareholders via buybacks and dividends:

"Today we are announcing a new share buyback programme resulting in an additional $4 billion of distributions, which we expect to complete by our Q4 2022 results announcement. Furthermore, we plan to increase the dividend per share (DPS) for the fourth quarter, which will be paid in March 2023, by an expected 15%, subject to Board approval."

Although Shell’s profit margins were lower than the prior quarter, it’s worth noting just how extraordinary those margins have been:

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The company is still turning a very healthy profit, more than making up for the catastrophic 2020 lockdown period.

All of the positivity needs to be balanced against the very real possibility of a windfall tax. The bigger the profits, the louder the calls will get. Shell CEO Van Beurden says that the energy industry "should be prepared and accept" that higher taxes will inevitably be levied against them to help the struggling sections of society.

Exxon CEO Darren Woods had some choice words on that front.

“There has been discussion in the U.S. about our industry returning some of our profits directly to the American people. That’s exactly what we’re doing in the form of our quarterly dividend.”

Quite how that helps the poor is anyone’s guess, but the verbal battle is set to ramp up with every profit beat.

Fellow energy giants BP & ConocoPhillips will report earnings this week too. Will they reinforce the energy outperformance trend?

Not investment advice. Past performance does not guarantee or predict future performance.

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