Shell (RDS.A) Gears Up For Q1 Earnings: What's In The Cards?

Royal Dutch Shell (LON:RDSa) plc RDS.A is set to release first-quarter 2018 results before the opening bell on Apr 26.

In the preceding three-month period, the company delivered a positive earnings surprise of 1.96% on the back of rebounding commodity prices and cost-cut initiatives. Notably, the company has an impressive earnings surprise history, surpassing estimates in each of the trailing four quarters, with an average positive earnings surprise of 9.34%. Investors are keeping their fingers crossed, expecting the Anglo-Dutch giant to top earnings estimate this time too.

The Zacks Consensus Estimate of $1.22 for the first quarter has been revised upward by 8 cents in the last seven days. The estimate of $1.22 also reflects a year-over-year decline of 48.8%.

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

Factors at Play

Per EIA data, crude oil rose about 7.5% in the first three months of 2018 to end the quarter at $64.87 per barrel. In fact, the first quarter of the year saw the U.S. oil benchmark to attain its highest settlement since December 2014, despite a record high domestic production. Crude was supported by various catalysts including strong demand, and continued production curb from OPEC and its allies. The upstream segment of Shell is likely to benefit from higher crude price realizations.

Last month, the company also raised the outlook for its downstream segment, which is poised for strong growth over the coming years. Shell plans to make a yearly investment of around $7-$9 billion in its downstream segment, forecasting a return on average capital employed of more than 15%. Importantly, the Chemicals business, which had a record year in 2017, is set to be the driving factor for the downstream business of the company.

Shell’s $50-billion buyout of BG Group has boosted its strong and diversified portfolio of global energy businesses that offer promising long-term growth opportunities. We appreciate the company’s cost-reduction initiatives and efficiency gains. Last quarter, Shell raked in $6,610 million free cash flow compared with $5,741 million a year ago. The trend is expected to continue and drive the financials of the company.

Moreover, Shell, which remains focused on reorienting and re-strategizing its portfolio, entered into various divestment deals this quarter — including the sale of Borssele wind project, coal gasification technology unit, West Qurna 1, Majnoon Field and a few others — to offload its non-core assets and buoy finances.

Though these deals will strengthen financials and credit metrics of the company, it might affect volume growth adversely. As it is, Shell's fourth-quarter 2017 oil and gas production declined sequentially as well as from the year-ago period.

Further, per EIA, prices of natural gas — which accounts for more than 40% of Shell’s total volumes — suffered a decline of 7.4% to end the quarter at $2.73 per million British thermal units, which can adversely impact the overall revenues.

Earnings Whispers

Our proven model does not show that Shell is likely to 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 estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. 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 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at $1.22.

Zacks Rank: Shell sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. Though a Zacks Rank #1 increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Conversely, 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 Poised to Beat Earnings

While earnings beat looks uncertain for Shell, one can consider firms from the energy space having the right combination of elements to beat estimates this quarter:

Apache Corporation (NYSE:APA) has an Earnings ESP of +7.53% and a Zacks Rank #3. The upstream player is anticipated to release earnings on May 2.

NOW Inc. (NYSE:DNOW) has an Earnings ESP of +17.65% and carries a Zacks Rank #3. The energy equipment maker is expected to release earnings results on May 2.

Pioneer Natural Resources Company (NYSE:PXD) has an Earnings ESP of +2.15% and a Zacks Rank #3. Texas-based energy explorer is anticipated to release earnings results on May 2.

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