Shell’s changing segment play
Before proceeding with Royal Dutch Shell’s (RDS.A) 1Q16 segment-wise outlook, let’s analyze Shell’s segment-wise earnings trend. Shell’s segment dynamics changed considerably in 4Q15 due to the decline in oil prices. The upstream segment that contributed 53% of the earnings in 4Q14, excluding identified items, contributed 27% in 4Q15. Brent prices that averaged $77 per barrel in 4Q14 declined to $44 per barrel in 4Q15.
On the other hand, Shell’s downstream segment earnings remained stable at $1.5 billion in 4Q15 compared to 4Q14. In fact, the downstream segment was the main contributor to 4Q15 earnings. Overall, earnings have declined from $3.2 billion in 4Q14 to $1.8 billion in 4Q15. The downstream segment has notably resisted the fall.
The situation is similar for Shell’s peer Exxon Mobil (XOM), which saw a steep fall in upstream earnings in the fourth quarter of 2015. On the other hand, Suncor Energy (SU) and Petrobras (PBR) reported losses in their upstream segments in 4Q15. The Vanguard Energy ETF (VDE) has ~37% exposure to integrated energy sector stocks.
Shell’s 1Q16 segment-wise outlook
In 1Q16, Shell’s (RDS.A) upstream segment is likely to put on a dull show due to weaker crude oil prices. WTI (West Texas Intermediate) and Brent prices that averaged $49 and $54 per barrel, respectively, in 1Q15, fell to $33 and $34 per barrel, respectively, in 1Q16.
Earnings from the downstream segment are also likely to be subdued. This is because cracks have been under pressure in 1Q16. A point in case is the broader market crack indicator, the US Gulf Coast WTI 3-2-1 crack, which has fallen from $19 per barrel in 1Q15 to $10 per barrel in 1Q16.