Energy giant Shell (SHEL.L) announced on Thursday a significant 56% decrease in its second-quarter profit, bringing the figure down to $5 billion. This decline was primarily attributed to the drop in oil and gas prices and shrinking refining profit margins. Consequently, the company decided to slow down its share repurchase program in response to the challenging market conditions.

Earnings Below Forecasts and Previous Year’s Figures

The reported earnings missed analysts’ forecasts and contrasted sharply with the previous year’s performance. In 2022, Shell experienced bumper earnings due to the surge in energy prices after Russia’s invasion of Ukraine. However, the current earnings were more in line with its second-quarter performance two years ago.

CEO’s Response and Future Plans

Despite the earnings setback, Chief Executive Officer Wael Sawan expressed the company’s commitment to prioritize share buybacks, considering the value they represent. In June, Sawan outlined the company’s strategy to enhance shareholder returns and improve overall performance. The plans included maintaining steady oil output, increasing natural gas production, and reducing investments in lower-return renewable energy projects.

Missed Forecasts and Comparisons

Shell’s adjusted earnings stood at $5.073 billion, falling short of the company-provided analyst forecast of $5.8 billion. The results were a significant decline compared to the record quarterly earnings of $11.5 billion reported a year earlier and $9.65 billion in the first quarter of 2023.

Market Response and Analyst Opinion

Following the earnings announcement, Shell shares experienced a 1.7% decline by 0730 GMT. This was in comparison to the broader European energy index (.SXEP), which saw a 1% decrease. Jefferies analyst Giacomo Romeo noted the results were “fairly disappointing” due to lower-than-expected earnings from the upstream and chemicals divisions, as well as weaker third-quarter guidance. Similar declines in profits were reported by French rival TotalEnergies (TTEF.PA) and Norway’s Equinor (EQNR.OL).

Factors Affecting Second-Quarter Results

Shell attributed the lower results primarily to reduced liquefied natural gas (LNG) trading revenue, decreased oil and gas prices, lower refining margins, and declining sales volumes compared to the previous quarter. The company’s LNG trading division, which holds the distinction of being the world’s top LNG trader, reported a halving of earnings compared to the previous quarter, impacting the overall performance of the flagship division.

Market Conditions Impacting Energy Prices

The sharp decline in energy prices this year was a stark contrast to the soaring prices witnessed in the aftermath of Russia’s invasion of Ukraine in the previous year. Benchmark Brent crude prices averaged $80 a barrel in the second quarter of 2023, down from $110 a year earlier. Similarly, LNG prices dropped significantly to $11.75 per million British thermal units (mmBtu) from approximately $33.

Debt Reduction and Financial Position

Despite the challenging market environment, Shell successfully reduced its debt pile to $40.3 billion by the end of the second quarter, down from $44.2 billion three months earlier. As a result, the company’s debt-to-capital ratio, known as gearing, improved by one percentage point to 17%.

In conclusion, Shell faced a challenging second quarter marked by a considerable decline in profit due to falling oil and gas prices, weaker refining margins, and reduced sales volumes. The company’s future plans include focusing on shareholder returns, steady oil output, and growth in natural gas production while trimming investments in lower-return renewable energy projects. Despite the disappointing earnings, Shell remains committed to its share repurchase program and continues to take measures to strengthen its financial position.