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Royal Dutch Shell to Report Earnings Thursday Morning: Should You Buy?

Mitchell Moore

Royal Dutch Shell RDS.A RDS.B is up 8.9% YTD, outperforming the oil and gas integrated market by almost 4%. The global oil giant will report earnings for fiscal Q2 on Thursday, August 1 before the market opens. Let’s take a look at the company and what to expect from its upcoming quarterly financial results.

Overview

Royal Dutch Shell is largest publicly traded oil company in the world and the fifth largest company in the world by revenues. The firm is a vertically integrated oil producer headquartered in the Netherlands and incorporated in Britain. It is active in every area of the oil and gas industry from exploration to refining to power generation. RDS produces about 3.7 million barrels of oil and oil equivalent per day, allowing the company to post huge revenue figures, amounting to $388.4 billion in 2018.

With such a large exposure to oil prices, RDS stands to benefit from the possible Fed rate cut this week. If the Fed cuts interest rates, which most believe they are almost certain to do, oil prices will likely rise with the market. This is because a healthier, faster growing market generally means a stronger outlook for oil consumption.

Oil prices are also supported by continued tensions in the Middle East at the moment. Iran seized a British tanker last week, causing prices to bump up as the economy fears Iran may make the Strait of Hormuz too dangerous to ship oil through. A fifth of the world’s oil moves through the strait every year, so this would have a dramatic impact on prices.

In Q1 2019, RDS posted revenues of $85.6 billion, a 6.1% drop from a year earlier. However, it posted EPS of $1.30, a 1.6% increase from a year earlier for a 23.8% earnings surprise that had a 2.5% positive impact on share price following the release.

Outlook

Our Zacks Consensus Estimates call for adjusted Q2 EPS of $1.22, for a solid 8.93% increase over a year prior. Despite the expected bottom-line positivity, revenue for this quarter is projected to drop 7.73% to $91.6 billion. For full-year fiscal 2019, estimates predict revenue will drop 14.8%, while earnings climb 1.4%. This large revenue downturn is likely due in part to slowing demand for oil as a result of U.S.-China trade tensions.

Looking further ahead, estimates for fiscal 2020 appear very promising, with revenue predicted to jump 5.3% above 2019. Earnings are projected to grow by 12.73%, showing that analysts likely think RDS can squeeze more profit out of some of its divisions.

Royal Dutch Shell announced during a management day last month that the company would initiate a massive buyback and dividend program of $125+ billion from 2021-2025. This is almost half of the company’s equity value planned to be returned to shareholders over a 5-year period. This means that if investors think RDS can deliver on its promises over the medium term, it will have one of the best total return prospects in the sector, making it very attractive.  

Over the past three years, RDS’s forward P/E ratio has stayed at a relatively consistent level and stayed consistently under the rest of the oil market, except for a few spikes caused by low earning quarters. This market is made up of other very similar large oil producers such as Exxon Mobil XOM, British Petroleum BP, and Total SA TOT. Therefore, we can expect the price to move consistently with earnings. Investors should look for positive price impact if earnings grow significantly. 

Bottom Line

Royal Dutch Shell currently holds a Zacks Rank #3 (Hold), because estimate revisions have been all over the board. Profits for RDS are generally affected by oil prices, so investors should keep an eye on tensions in the Middle East, the Fed rate, and any other macro events that impact prices.

Royal Dutch Shell stock is by no means a growth stock, but a commodities producer that is likely to post steady earnings growth helps make it appealing. Plus, with a dividend yield currently at 5.04% and more buybacks and dividends promised, this stock could be a great choice for a long-term portfolio.

Side-note

If you do plan on investing in Royal Dutch Shell, either now or in the future, be sure to understand the difference between its two classes of shares. Shares of RDS.A have a Dutch source, while shares of RDS.B have a UK source. This only affects the tax implications of dividend payment. A guide to what this means for you can be found here.

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