Can Royal Dutch Shell (RDS.A) Surprise Q2 Earnings?

Europe’s largest oil company Royal Dutch Shell (LON:RDSa) plc RDS.A is set to release its second-quarter 2016 results before the opening bell on Thursday, July 28.

In the preceding three-month period, The Hague-based supermajor posted a negative earnings surprise of 15.38% amid sharply lower oil and gas prices.

As far as the earnings surprise history is concerned, the company has a poor record: its missed estimates in 3 of the last four quarters with an average miss of 6.83%.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Unlike the previous few quarters, second-quarter 2016 turned out to be a rather good one with crude advancing more than 26% sequentially -- the best quarterly percentage gain in seven years – while natural gas prices jumped 49%, the most since 2005. Royal Dutch Shell’s upstream business will undoubtedly gain from this uptick.

However, there are signs of weakness in the refining business, suggesting that the unit – which had saved Royal Dutch Shell when crude prices plunged – could now be a drag. With the cost of gasoline, heating oil, and other refined products catching up on the beaten down crude price, crack spreads (or refining margins) are under pressure. This is expected to impact Shell's near-term downstream profitability. Burgeoning supplies of gasoline, the most widely used petroleum product, and the resulting low prices are also a cause for concern.

Earnings Whispers

Our proven model does not conclusively show that Royal Dutch Shell will beat estimates this quarter. 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) to be able to beat consensus estimates. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.89%. This is because the Most Accurate estimate stands at 52 cents, while the Zacks Consensus Estimate is pegged higher, at 53 cents.

Zacks Rank: Royal Dutch Shell has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Royal Dutch Shell, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

SunCoke Energy Inc. (NYSE:SXC) has an Earnings ESP of +400.00% and a Zacks Rank #1. The company is expected to release earnings results on July 28.

Pioneer Natural Resources Co. (NYSE:PXD) has an Earnings ESP of +19.44% and a Zacks Rank #2. The company is anticipated to release earnings on July 27.

Anadarko Petroleum Corp. (NYSE:APC) has an Earnings ESP of +1.30% and a Zacks Rank #2. The company is likely to release earnings on July 26.