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How Severely Will Coronavirus Impact Shell's (RDS.A) Q2 Earnings?

Zacks Equity Research

Royal Dutch Shell PLC RDS.A is set to report second-quarter 2020 results on Thursday Jul 30, before the opening bell.

The current Zacks Consensus Estimate is pegged at a loss of 29 cents for the to-be-reported quarter.

Against this backdrop, let’s delve into the factors that might have impacted the company’s June-quarter performance.

Key Q2 Predictions

It’s common knowledge that the oil price has been continuous pressure ever since the coronavirus hit global energy demand hard. As a result, the outlook for all industries in the energy sector seems dull. Shell envisioned its post-tax impairment charges between $15 billion and $22 billion for the second quarter. This hefty write-down is anticipated because of the coronavirus outbreak due to which demand deceleration wiped billions off the oil and natural gas asset value.

Upstream

Per Shell, the upstream production is projected between 2,300 and 2,400 thousand barrels of oil equivalent per day (boe/d). The year-ago production was 2,656 thousand boe/d. However, Shell had earlier predicted second-quarter upstream volumes to be 1,750-2,250 thousand boe/d.

Downstream

Shell estimates second-quarter oil product sales in the band of 3,500-4,500 thousand barrels per day, indicating a 46.8% decrease from the year-earlier reported number. This downside follows a dramatic drop in demand stemming from the adverse COVID-19 impact, assuming that the upper end of the estimate will be met. The Netherlands-based company anticipates its refinery availability between 67% and 71%. Moreover, its chemical sales volumes are forecast between 3,400 and 3,700 thousand tons, suggesting a marginal fall from the year-ago reported figure.

Integrated Gas

The company expects second-quarter LNG liquefaction volumes to contract to 8.1-8.5 million tonnes from its previous year’s quarterly output of 8.66 million tonnes. Moreover, its segmental production is forecast in the 880-910 thousand boe/d band. In the year-earlier period, Shell produced 927 thousand boe/d. For the quarter to be reported, the company expects to incur additional $250-$350 million well write-offs from the prior-year time frame due to tepid macroeconomic outlook.

What Does Our Model Say?

The proven Zacks model does not conclusively predict an earnings beat for Shell this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of beating estimates. But that’s not the case here as elaborated below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Shell has an Earnings ESP of 0.00%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at a loss of 29 cents per share each.

Zacks Rank: Shell currently carries a Zacks Rank #2, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult for the stock this earnings season.

Highlights of Q1 Earnings & Surprise History

Europe’s largest oil company Shell reported first-quarter earnings per ADS (on a current cost of supplies basis excluding items, the market’s preferred measure) of 74 cents, above the Zacks Consensus Estimate of 51 cents on higher LNG sales volumes.

However, the bottom line compared unfavorably with the year-ago profit of $1.30. This underperformance was mainly induced by lower oil and gas prices.

Shell’s revenues of $61 billion declined 29% from first-quarter 2019 sales of $85.7 billion.

As far as its earnings surprises are concerned, this Hague-based company’s bottom line trumped the Zacks Consensus Estimate in two of the trailing four quarters and missed the same in the remaining two, the average surprise being 7.13%. This is depicted in the graph below:

Royal Dutch Shell PLC Price and EPS Surprise

Royal Dutch Shell PLC Price and EPS Surprise
Royal Dutch Shell PLC Price and EPS Surprise

Royal Dutch Shell PLC price-eps-surprise | Royal Dutch Shell PLC Quote

Stocks to Consider

While earnings outperformance looks uncertain for Shell, here are some firms worth considering from the energy space on the basis of our model, which shows that these have the perfect combination of ingredients to deliver a positive surprise this reporting cycle:

TechnipFMC plc FTI has an Earnings ESP of +8.26% and is Zacks #3 Ranked at present. The company is scheduled to release earnings on Jul 29.

Helmerich Payne, Inc. HP has an Earnings ESP of +2.03% and is presently a #3 Ranked player. The firm is scheduled to release earnings on Jul 29. You can see the complete list of today’s Zacks #1 Rank stocks here.

Oceaneering International, Inc. OII has an Earnings ESP of +26.39% and a Zacks Rank #3, currently. The company is scheduled to release earnings on Jul 29.

Zacks Top 10 Stocks for 2020

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Helmerich Payne, Inc. (HP) : Free Stock Analysis Report
 
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