Royal Dutch Shell (RDS.A): What Will Q1 Earnings Unveil?

Europe’s largest oil company Royal Dutch Shell (LON:RDSa) plc RDS.A is set to release its first-quarter 2017 results before the opening bell on Thursday, May 4.

In the preceding three-month period, The Hague, Netherlands-based supermajor reported weaker-than-expected earnings as profits in its downstream business slipped on depressed refining margins.

Coming to earnings surprise history, Shell has a bad record: its missed estimates in 3 of the last four quarters.

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

Factors to Consider This Quarter

At the end of the first quarter, oil was trading at $50.60 per barrel, while natural gas hovered around the $3.20 per million British thermal units – both in a sweet spot compared to the corresponding period of 2016. While crude slumped to a 12-year low in the year-ago quarter, natural gas futures dropped to its worst level in almost 17 years.

All this bodes well for Royal Dutch Shell and its upstream unit in particular. Improving commodity prices would also considerably augment the group's cash flows. Shell’s successful cost reduction initiatives and efficiency gains are expected to further cushion the results.

Production gains too present a bright spot for the group. In the previous quarter, Shell’s upstream volumes averaged 2,997 thousand oil-equivalent barrels per day (MBOE/d), 25% higher than the year-ago period. While crude oil production increased 30%, natural gas output was up 17% -- thanks to the contribution from BG Group that was acquired in early 2016.

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 fourth-quarter of 2016 saw the integrated behemoth’s downstream segment income erode on lower margins from refined product sales.

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. 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 -7.32%. This is because the Most Accurate estimate stands at 76 cents, while the Zacks Consensus Estimate is pegged higher, at 82 cents.

Zacks Rank: Royal Dutch Shell’s Zacks Rank #4 (Sell) further decreases the predictive power of ESP, making us less confident of an earnings surprise call.

As it is, 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.

Share Performance:

Shares have fallen around 4% over the past 3 months, mirroring the Zacks categorized Oil & Gas - International Integrated industry gains. Over the last 12 months, Royal Dutch Shell stock has lost 1%.

Stocks to Consider

While earnings beat looks uncertain for Royal Dutch Shell, here are some energy firms 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:

PBF Logistics L.P. (NYSE:PBFX) has an Earnings ESP of +10.91% and a Zacks Rank #1. The partnership is expected to release earnings results on May 4. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Global Partners L.P. (NYSE:GLP) has an Earnings ESP of +233.33% and a Zacks Rank #1. The partnership is anticipated to release earnings on May 9.

NOW Inc. (NYSE:DNOW) has an Earnings ESP of +17.39% and a Zacks Rank #2. The company is likely to release earnings on May 3.

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