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Analyzing the Prospects for Shell’s 3Q17 Segmental Earnings

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Oct. 26 2017, Updated 8:12 a.m. ET

Shell’s segmental earnings trend

In this part, we’ll analyze how Royal Dutch Shell’s (RDS.A) segmental earnings performed in 2Q17. We’ll also discuss Shell’s 3Q17 outlook.

Shell’s Upstream segment’s earnings fell to -$1.33 billion in 2Q16. The segment’s earnings switched to a profit of ~$339 million in 2Q17 on a CCS EII (current cost of supplies excluding identified items) basis. Shell’s Integrated Gas earnings rose 35% compared to 2Q16 to $1.17 million in 2Q17. The earnings rose due to an increase in LNG (liquefied natural gas) prices and LNG sales volumes. Shell’s Downstream segment’s earnings rose 39% compared to 2Q16 to $2.53 billion in 2Q17 due to strong chemical and refining conditions.

The downstream segment added 68% to Shell’s total adjusted earnings, while the Upstream segment added 9% and the Integrated Gas segment added 31%. However, corporate expenses dented the earnings by 9%. The Downstream segment’s earnings accounted for a significant portion of Shell’s earnings.

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Shell’s peers ExxonMobil (XOM), Chevron (CVX), and BP (BP) also saw their contribution from segmental earnings shift in 2Q17. ExxonMobil’s upstream earnings rose to $1.18 billion in 2Q17 from $294 million in 2Q16. Chevron’s upstream segment posted a loss in 2Q16. The segment’s earnings rose to $853 million in 2Q17. BP’s adjusted upstream earnings rose to $710 million in 2Q17 from $29 million in 2Q16.

Shell’s 3Q17 segmental outlook

Shell is expected to witness a rise in its upstream realizations in 3Q17—compared to 3Q16. Brent and WTI (West Texas Intermediate) crude oil prices have risen in 3Q17—compared to 3Q16. Brent and WTI prices stood at $47 per barrel and $45 per barrel, respectively, in 3Q16. The prices rose to $52 per barrel and $48 per barrel, respectively, in 3Q17. Similarly, Henry Hub natural gas prices increased from $2.8 per MMBtu (million British thermal units) in 3Q16 to $3.0 per MMBtu in 3Q17. Usually, everything else being equal, a rise in crude oil and natural gas price suggests an increase in Shell’s upstream earnings in 3Q17, assuming the volumes don’t fall YoY (year-over-year).

The earnings from Shell’s Downstream segment will likely rise. The cracks have expanded in 3Q17—compared to 3Q16. For instance, the US Gulf Coast WTI 3-2-1, the benchmark crack, has widened by $6.8 per barrel YoY to $20.5 per barrel in 3Q17. It points towards the likely rise in Shell’s refining margin in 3Q17—compared to 3Q16.

If we evaluate the quarter-over-quarter performance, crude oil prices have remained flat in 3Q17. However, the refining crack indicators have risen quarter-over-quarter.

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