Shell Plc’s (NYSE: SHEL) flagship LNG trading division reported a loss of nearly $1B, sources have revealed to Reuters. The loss is attributed to serious whiplash after the company’s LNG traders were caught flat-footed by the surge in natural gas prices following Russia’s gas supply cuts to Europe. The latest revelation is, however, hardly surprising given that Shell has issued a weak update issued earlier in October.
“Earnings estimate (US$8.2bn) is 8% below consensus and we believe the gas trading issues in Q3 could extend to 4Q if the JKM-TTF differential widens again,” Jefferies said after the update while maintaining a Buy rating for SHEL stock.
The loss was a result of a wrong bet on the difference between benchmark Asian and European gas prices over the summer months, with European prices far oustripping those by their Asian brethren. JKM (Japan-Korea Marker) generally acts as a satellite price to the more liquid European benchmark TTF (Title Transfer Facility) gas hub price. Growth in spot trading liquidity has seen JKM increasingly used as the basis for physical trades (both in and outside Asia) as well as increasingly a contract reference point for derivatives (e.g. JKM swaps) and even medium to longer term supply contracts.
Nevertheless, Shell was still able to post its largest quarterly profit at $9.45B from $4.13B during last year’s corresponding period. Shell also raised its dividend for Q4 by 15% and announced plans to buy back another $4B of shares in the quarter, bringing total share repurchases for the year to $18.5B.
Gas trading divisions by Shell’s peers performed much better, ironically due to heightened volatility. To wit, BP Plc. (NYSE: BP) posted adjusted Q3 profit for the gas and low carbon energy unit at $6.24B, more than double the $3B profit the business made in Q2.
Analysts at Jefferies now think that BP will buy back shares at an even higher clip than it has announced thanks to those earnings. The analysts note that BP has been consistently better than European peers Shell (NYSE: SHEL) and TotalEnergies (NYSE: TTE) at capturing the tighter LNG market this year.
“We believe BP will be able to set buyback at US$11bn over the next four quarters, setting BP's shareholder remuneration yield at the highest level in the sector (12%),” Jeffries analysts have said.