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In the past 12 months, the A shell (LSE:SHEL) share price is down almost 7%. And the company is set to report its earnings in the third quarter of 2024.
It looks like the profit will be lower than last year. But with the stock already down, does the bad news count?
A difficult setup
There are two reasons why Shell’s earnings are expected to be weaker than in 2023. One is that things were very difficult then and the other is that they are very difficult now.
Earlier this week, BP reported its lowest quarterly profit since 2020. And the company has identified weak refining margins as the main reason for this.
Gasoline and diesel refining margins Q3 2023-present
It is certainly true that diesel and petrol margins are lower than last year – and this is the same for Shell as it is for BP. But the low resolution difference is not the only problem.
BP also said trading earnings had normalized after an unusually strong Q3 2023. Shell also reported a surprising performance in its trading last year, so that too could be down.
Outlook
These factors mean I don’t expect much in the way of positive surprises from Shell when they report earnings on Thursday (October 31). But the biggest problem for investors is the future.
Regarding margin refinement, the view is mixed. While the petrol differential is almost where it was last year, the diesel spread is still very low.
As a result, I expect weakness in margin refinement to continue into Q4 of this year. And the outlook for oil prices broadly is also challenging in the near term.
The supply side of the equation looks strong, while the demand side looks weak. Ultimately, that means prices are unlikely to rise until something changes.
Opportunity to buy?
All this means that there is not much reason to be optimistic for Shell – and oil companies in general. But sometimes, the best time to buy can be when everyone is looking elsewhere.
With Shell specifically, I’m not sure this is the time, though. Looking at where the stock has been trading in terms of price-to-book (P/B) ratio over the past 10 years is interesting.
Shell P/B ratio 2015-24
Created in TradingView
The current share price implies a P/B multiple of 1.15, which is roughly in the middle of the historical range. To me, that doesn’t mean investors are too worried right now.
Given this, I’m inclined to think that the market is likely to look beyond the company’s short-term problems. And while that’s admirable, it doesn’t necessarily make it a buying opportunity.
Keep watching
I don’t have high expectations for Shell ahead of the company’s Q3 earnings. The business is facing a set of tougher trading conditions than last year.
I actually think this may continue, but I’m not sure the current share price reflects this. So I will keep this one on the watch list and look elsewhere for possibilities.
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