Very high commodity prices caused by the war in Ukraine may have presented a major opportunity for the energy sector. Oil & gas companies were trying to meet the rapidly growing demand caused by the interruptions and halting of Russian gas and oil deliveries to Europe.
How did energy companies perform?
Shell Plc (SHELL) and BP Plc (BP) are Europe's largest petrochemical companies, extracting, processing and selling oil and natural gas. They control almost all stages of the extraction, processing and distribution process, which can be an advantage with high volatility in the fuel market. This way, companies are relatively well protected against the need for switching suppliers, partners' commissions and margin reduction.
"With volatile energy markets and the continued need for action to combat climate change, 2022 continues to pose a huge challenge for consumers, governments and companies alike," - said CEO Ben van Beurden in a statement.
However, despite "volatile energy markets," energy companies were able to make extraordinary gains. Shell reported a whopping $100.1 billion in Q2 revenue, up from $84.2 billion in Q1. To show magnitude, H1 2022 revenue is more than the revenue for the whole of 2021. BP, on the other hand, reported $67.9 billion in revenue against a forecast of $60.9 billion. The company's strong performance in oil refining and sales contributed to this spectacular beat in expectations, according to the company. Shell and BP's revenues rose 65.3% and 85.9% year-on-year, respectively. Other companies in the sector such as Chevron, Exxon and TotalEnergies also posted giant increases in revenues and profits.
Earnings per share (EPS) were as high as $3.08 for Shell, almost 10% higher than the expected $2.80 EPS. BP surprised the market with $2.61 in earnings per share (EPS), significantly beating forecasts of $0.34 per share (a 658.5% surprise). Shell and BP increased their net profits by as much as 109.1 and 215.8% year on year.
The extraordinary profits will be used for buybacks. Shell and BP announced that they spent $8.5 billion and $3.5 billion, respectively, on share buybacks in the first half of the year. Shell plans to spend another $6 billion and BP $3.5 billion for this purpose. BP additionally decided to raise its dividend by 10%.
According to the Bloomberg news service, the buybacks are evidence that the war in Ukraine has brought significant profits to the sector. However, high fuel prices can pose the threat of a cost crisis and strangle the economy, as recent readings of energy prices and GDP changes in major economies have proven. The price of energy in Germany is now at record levels of more than 700 euros per MG of energy for next year, and according to the U.S. Bureau of Statistics, U.S. GDP in the second quarter once again recorded negative growth, this time at -0.9%. This could affect the future performance of the fuel giants.
Rafał Tworkowski, Junior Market Analyst, Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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