Royal Dutch Shell (RDS.A): What Will Q3 Earnings Unveil?

Europe’s largest oil company Royal Dutch Shell (LON:RDSa) plc RDS.A is set to release its third-quarter 2016 results before the opening bell on Tuesday, Nov 1.

What Investors Need to Know

The company’s stock performance has been pretty choppy lately, and it will be up to this coming release to set the trend heading into 2017.

However, The Hague-based supermajor has a good industry rank – in the top 41% overall. Shell also has a Zacks Rank #2 (Buy), so fundamentals are pretty strong for this stock.

But the company has a dismal great track record when it comes to earnings and has missed estimates in each of the last four quarters, as you can see in the chart below:

Earnings estimates have also been sluggish for the stock, as the consensus estimate has been going down over the past few months. This is something that investors definitely don’t want to see heading into a report. To make matters worse, it has an ‘F’ for its VGM Score.

Therefore, notwithstanding Shell’s ‘Buy’ rating, the signals are mixed and it seems as if it could be a rockier report than one might think.

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

Factors to Consider This Quarter

Unlike the last quarter, where oil advanced more than 26% sequentially to notch up the best quarterly percentage gain in 7 years, the Jun-Sep 2016 period turned out to be a rather flat one with crude barely advancing. In fact, the West Texas Intermediate (WTI) crude futures during the third quarter hovered around the $45 per barrel mark, flat from the second quarter and down from $46.50 in the same period last year. This does not bode well for Shell and its upstream unit in particular.

Worryingly, there are signs of weakness in the refining business, suggesting that the unit – which saved Shell when crude prices plunged – could now be a drag. The second quarter saw the integrated behemoth’s downstream segment income erode on fuel oversupply and weak demand. With refined product inventories remaining at their maximum seasonal levels in at least 20 years and margins set to narrow, Shell could be in for more trouble in the to-be-reported quarter.

However, production gains present a bright spot for the group. In the previous quarter, Shell’s upstream volumes averaged 2,628 thousand oil-equivalent barrels per day (MBOE/d), 24% higher than the year-ago period. While crude oil production increased 24%, natural gas output was up 23% -- thanks to the contribution from BG Group that was acquired earlier in the year.

Chevron’s successful cost reduction initiatives are expected to cushion the results. At $12 billion, the company’s capital and exploration expenditure for the first half of this year has run 31% lower than in the equivalent period of 2015.

Finally, Shell is set to benefit from lower unit costs in the upstream business and is on track achieve its previous guidance of a 20% reduction between 2014 and the end of 2016.

Earnings Whispers

Our proven model does not conclusively show that 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. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

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 -7.41%. This is because the Most Accurate estimate stands at 50 cents, while the Zacks Consensus Estimate is pegged higher, at 54 cents.

Zacks Rank: Shell has a Zacks Rank #2. Though a Zacks Rank #2 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 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 earnings beat this quarter:

W&T Offshore Inc. (NYSE:WTI) has an Earnings ESP of +11.63% and a Zacks Rank #1. The company is expected to release earnings results on Nov 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Devon Energy Corp. (NYSE:DVN) has an Earnings ESP of +20.00% and a Zacks Rank #2. The partnership is anticipated to release earnings on Nov 1.

Comstock Resources Inc. (NYSE:CRK) has an Earnings ESP of +3.74% and a Zacks Rank #2. The company is likely to release earnings on Nov 8.

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