August 01, 2020 [Bloomberg] – The secretive oil-trading businesses of Royal Dutch Shell Plc and Total SE saved both European majors from posting losses in the second quarter, bringing a torrent of cash that countered the impact of the coronavirus crisis.

 
Investors had already been warned that the pandemic hammered almost all parts of the energy giants’ businesses — from forecourts, to oil and gas production, to the long-term value of assets. But that was offset by gains from speculating on energy markets, the companies said Thursday.

In keeping with tradition, Shell and Total didn’t disclose exactly how much money their trading operations made, but acknowledged they were able to exploit extreme price volatility during April’s record supply glut.

The quarter was “the best on record” for Shell’s trading unit, Chief Financial Officer Jessica Uhl said on a call with reporters. “It was a really outstanding performance.”

When asked by investors on a separate call about how much money the traders made, Total CEO Patrick Pouyanne responded: “The oil trading is a secret.” He would only say it made about $500 million more than usual, but refused to disclose what’s the normal baseline.

Shell took advantage of its sprawling infrastructure that allowed it to capitalize on the market’s volatility — from storing oil cheaply to adapting its refineries to meet changes in demand. Shell benefited from “all sorts of arbitrages that opened up in unusual parts of the world,” Chief Executive Officer Ben van Beurden said in a Bloomberg Television interview.
 

U.S. Difference

With trading floors that resemble the operations of Wall Street banks in cities from London to Singapore, the European majors have an edge over their main American rivals, which market their own energy production but largely eschew pure trading as a means of generating profits. That means that Exxon Mobil Corp. and Chevron Corp., which publish results on Friday, are unlikely to report a similar boost in the second quarter.

Shell’s adjusted net income was $638 million in the second quarter, down 82% from the same period a year earlier but far better than the average analyst estimate of a $664 million loss. Total posted a surprise profit of $126 million, compared with expectations for a loss of $443 million.

Those figures exclude tens of billions of dollars of writedowns on the value of the companies’ assets resulting from the slump in oil and gas prices, which had already been disclosed to investors.

Shell’s B shares fell 5.7% to 1,113.8 pence as of 4:55 p.m. in London. Total fell 1.6% to 31.93 euros in Paris.
 

Contango Trade

When oil prices plunged last quarter, traders were able to buy crude on the cheap, store it and lock in a profit from the future sale by selling forward in the derivatives market. The profit was possible because spot prices were much lower than forward prices, a situation known as contango.

With its vast access to data from its shipping network, its refining positions and high flow of trades, Shell was able to capitalize on the market structure more extensively than the average trader, finding contango plays in more obscure non-benchmark crudes.

“We do contango on steroids,” Van Beurden told analysts in a call.

It’s unlikely that profits from trading will remain at the same level during the rest of the year, since the contango has since diminished significantly and market volatility has eased.

Shell’s “very strong trading and optimization performance that we saw in the second quarter is not necessarily an indication for the third quarter,” CFO Uhl said. While she wouldn’t disclose how much money the company’s traders made, there were some clues in its statement.

Shell’s entire refining and trading business delivered adjusted net income of $1.5 billion in the period, more than 20 times larger than a year earlier. Considering that the part of Shell’s business that actually manufactures fuel suffered one of its worst-ever quarters, with low margins and sales volumes, it’s possible that the bulk of those earnings came from trading.

Last week, Norway’s Equinor ASA said its trading division made a record $1 billion gain in the second quarter. British oil giant BP Plc, which runs a large trading business similar to those at Shell and Total, is also likely to report gains from that unit when it announces results next Tuesday.

“Trading platforms always deliver a positive surprise in terrible macro conditions,” said Oswald Clint, an analyst at Sanford C Bernstein Ltd.

Those conditions prompted dismal results in most other areas of the companies’ operations. And not every producer was able to avoid the expected loss. Italian oil giant Eni SpA, which also published earnings on Thursday, lost 714 million euros ($839 million) and announced a dividend cut.

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