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Weak Oil, Refining Margins to Mar Shell (RDS.A) Q4 Earnings

Zacks Equity Research

Royal Dutch Shell plc RDS.A is set to announce fourth-quarter 2018 results on Jan 31, before the opening bell.

In the preceding three-month period, the Hague-based supermajor reported weaker-than-expected results owing to lackluster performance from its downstream segment. The Anglo-Dutch energy company has a mixed earnings surprise history. It surpassed earnings estimates in two of the last four quarters, with average negative surprise of 5.07%.

Royal Dutch Shell PLC Price and EPS Surprise

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

Let’s see which way are the company’s top and bottom-line estimates headed this time. The Zacks Consensus Estimate for revenues is pegged at $86.9 billion compared with $85.4 billion in the prior-year quarter. The Zacks Consensus Estimate for fourth-quarter earnings of $1.30 per share also reflects a year-over-year increase of 25%. However, earnings estimates for the to-be-reported quarter have been revised downward by six cents in the past seven days.

Let’s delve deeper into the factors that are likely to influence Shell’s earnings in the quarter to be reported.

Factors at Play

During fourth-quarter 2018, the West Texas Intermediate (WTI) crude plunged from a multi-year high of $76.40 a barrel in early October to below $45 in late December, per the U.S. Energy Information Administration. Oil prices took a beating during the quarter amid supply glut, U.S.-Sino trade tensions, weakening demand outlook and concerns related to economic slowdown. This will keep the company’s 60% liquids-weighted portfolio under pressure. As it is, Shell is bearing the brunt of contracting oil production since the last few quarters owing to the company’s asset sales program. The weakness in oil prices and lower oil production volumes are likely to have an adverse impact on the company’s upstream revenues.

Shell’s downstream segment is also likely to get impacted, as crack spreads have narrowed in the quarter vis a vis the prior-year period. As it is, the company’s downstream profits fell 25% in the last reported quarter owing to weaker refining margins and the trend is likely to continue this time as well. Markedly, crack spreads in the United States are at a five-and- a-half month low and spreads are even lower, in the negative, in Europe. This is likely to lower year-over-year refining margins, thereby weakening downstream income of the company.

The average monthly spot prices of the commodity in the respective months of third-quarter 2018 were $3.21, $4.11 and $3.90 per Million Btu, representing healthier prices than fourth-quarter 2017. While higher natural gas prices may aid the integrated gas segment of the firm, Shell is likely to come up with weaker results amid tepid upstream and downstream performance.

Earnings Whispers

Our proven model also shows that Shell is unlikely to beat estimates this earnings season. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.   

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate are both pegged at $1.30. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Shell currently carries a Zacks Rank #5 (Strong Sell). As it is,we caution investors against stocks with a Zacks Rank #4 (Sell) or 5 going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Though an earnings beat looks uncertain for Shell, here are a few firms from the energy space that you may want to consider on the basis of our model. These have the right combination of elements to post an earnings beat in the quarter to be reported.

Patterson-UTI Energy, Inc. PTEN has an Earnings ESP of +0.54% and a Zacks Rank #3. The firm is expected to release fourth-quarter earnings on Feb 7.

Philips 66 PSX has an Earnings ESP of +18.19% and holds a Zacks Rank #3. The firm is expected to report fourth-quarter earnings on Feb 8.

Williams Companies WMB has an Earnings ESP of +7.24% and a Zacks Rank #3. The firm is expected to release fourth-quarter earnings on Feb 13. You can see the complete list of today’s Zacks #1 Rank stocks here.

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