Shell Stock, WTI, and SPY Ahead of Q2 Earnings


Jul. 12 2019, Updated 7:51 a.m. ET

Shell’s stock returns

Royal Dutch Shell (RDS.A) is scheduled to announce its second-quarter results on August 1. We’ll forecast Shell’s stock price based on its current implied volatility. We’ll also discuss Shell’s dividend yield compared to its peers.

Since June 10, Shell stock has risen. We’ll compare Shell’s returns to WTI and the SPDR S&P 500 ETF (SPY). WTI represents benchmark crude oil, while SPY is an equity market indicator.

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Oil prices have been trending upwards in the past month. Since June 10, WTI has risen 11.9%. Oil prices increased due to the extension of OPEC’s production cut. Most market participants are concerned about global oil supply glut this year. The production cuts are meant to balance global oil supply and demand dynamics. The sanction against Iran are helping oil prices.

We’ll compare Shell stock, the broader market, and oil’s price performance in the past month. Since June 10, WTI has risen 11.9%, SPY has increased 3.8%, and Shell stock has increased 1.2%. Investors expect an interest rate cut as early as July, which supported the market.

Correlation between Shell stock, SPY, and WTI

We’ll test the correlation between Shell stock and SPY. A correlation coefficient between zero and one shows a positive relationship. Zero states no correlation. A correlation coefficient between negative one and zero shows an inverse correlation. Shell’s correlation coefficient versus SPY is 0.52. There’s a positive relationship between Shell and SPY. Shell stock moves in line with SPY to a certain extent. The coefficient value shows that changes in SPY can explain ~52% of the changes in Shell’s stock price. Shell’s correlation coefficient versus WTI stands at 0.57—a bit higher than Shell’s correlation coefficient versus SPY.  Shell stock has moved in line with oil and the market.

Shell stock had 1.2% gains, while SPY had 3.8% gains. Shell stock has underperformed SPY in the past month. Chevron and Total have risen 3.3% and 5.5%, respectively, since June 10. ExxonMobil and Suncor have risen 3.9% and 6.4%, respectively.

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Price range forecast

We’ll discuss Shell’s stock price forecast range for 22 days before its earnings. The current implied volatility in Shell impacts the price range forecast. The company is expected to post its second-quarter earnings on August 1.

The implied volatility in Shell has fallen by 5.6 percentage points since June 10 to the current level of 12.3%. During the same period, Shell stock has risen 1.2%.

To estimate Shell’s stock price range, we considered its implied volatility of 12.3% and assumed a normal distribution of prices with one standard deviation. Shell’s stock price could close between $67.2 and $63.3 per share in the 22 calendar days before August 1.

Peers’ implied volatility

The implied volatility in Total has fallen by 3.1 percentage points since June 10 to 16.7%. The implied volatility in Equinor and Petrobras fell by 1.7 percentage points and 3.4 percentage points, respectively, during the same period. Currently, Equinor and Petrobras’s implied volatilities are 23.8% and 32.6%, respectively. Based on the stock prices, Total, Equinor, and Petrobras have risen 5.5%, 0.4%, and 5.9%, respectively, since June 10. While the implied volatility fell, the stock prices rose, which shows an inverse relationship.

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Markets’ implied volatility

The SPDR Dow Jones Industrial Average ETF (DIA) and SPY closely resemble the Dow Jones Industrial Average and the S&P 500 Index. The implied volatility in DIA and SPY has fallen, respectively. In the past month, the implied volatility has fallen by 2.8 percentage points in DIA and by 3.1 percentage points in SPY. Currently, the implied volatility in DIA and SPY is 11.2% and 10.6%, respectively. DIA and SPY’s values have risen 3.5% and 4.1%, respectively, during the same period.

Dividend payment expectation

Shell paid stable dividends in the past few years. In the second quarter, Shell paid a dividend of $0.94 per share, which is equal to the dividend its paid in the second quarter of 2017. Shell announced the dividend on May 2. The company settled the dividend on June 24.

Analysts expect Shell’s dividend payment per share to stay steady at $0.94 per ADS in the second quarter. Shell has kept its quarterly dividend constant at $0.94 per share since the second quarter of 2014. Shell will likely follow the trend and pay the same dividend in the second quarter. The company has a share buyback program to raise shareholders’ returns.

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Currently, Shell’s dividend yield is 5.8%. The dividend yield fell from 7.2% in the second quarter of 2017.  Shell’s yield fell due to an increase in its stock price during the stated period. Shell has the second-best dividend yield compared to its peers. BP has the highest dividend yield of 6.0%. Total and ENI’s yields are 5.3% and 5.7%, respectively. However, ExxonMobil, Chevron, and Equinor have lower dividend yields at 4.6%, 3.9%, and 4.8%, respectively.

Shell’s shareholder returns

Shell focused on improving shareholder returns. The company wants to extend the benefits of higher earnings and cash flows to shareholders. Shell wants to offset the dilution from the BG Group acquisition and the scrip dividend program. The company plans to repurchase shares of ~$25 billion until 2020.

In the latest tranche of Shell’s share buyback program, the company planned to buy a maximum of ~$2.75 billion shares until July 29. The tranche follows the previous three tranches. Shell repurchased $6.75 billion of shares between July 26, 2018, and April 29.

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In the first-quarter earnings conference call, Shell’s CFO, Jessica Uhl, said, “We continue to believe in our ability to complete $25 billion in share buybacks by the end of 2020, subject to further progress on debt reduction and oil price conditions.” She further added, “To deliver on our world-class investment case ambition we have reshaped Shell. Our leading cash generation and returns position reflect the strategic and portfolio choices we have made. And our focus on operational excellence, integration and our brand has made the most of these choices. We are committed to maintaining our leading position in each of these metrics, to continue delivering competitive returns and cash flow from operations.”

Short interest trends

The short interest in Shell fell from 0.164% on June 10 to the current level of 0.155%. Usually, a decline in the short interest could indicate reduced bearish sentiment for a stock. Shell’s stock price rose 1.2%.

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Higher oil prices and upstream updates

The lower short interest in Shell could be due to higher oil prices. Since June 10, WTI crude oil prices have risen 11.9%. Oil prices are vital for integrated energy companies. Oil prices are a leading determinant of a firm’s upstream earnings. The rise in oil prices could mean higher upstream profits for Shell.

The upstream project updates could have raised the positive sentiments in the stock. Shell started production at Appomattox, its mega project, at the end of May. The production started ahead of schedule and below the budget. The budget is ~40% lower since the FID in 2015. The project is expected to produce 175,000 barrels per day of oil equivalent. Shell and its partners announced the departure of the first LNG (liquefied natural gas) shipment from its Prelude FLNG project. To learn more about Shell’s growing upstream portfolio, read Shell’s Upstream Production: Poised for Growth.

Better second-quarter estimates

The positive sentiments in Shell stock could be due to an expected rise in its second-quarter earnings. Shell’s EPS is estimated to grow 12% YoY to $1.25 in the second quarter. The company’s downstream earnings will likely increase in the second quarter. The industry crack indicates the refining margin. The industry crack rose 9% YoY in the second quarter, which would have a positive impact on the company’s refining earnings. However, WTI prices fell 12% YoY in the second quarter, which would have likely hit Shell’s upstream realizations and earnings.

Since June 10, the short interest in Total and Equinor has fallen by 0.03 percentage points and 0.08 percentage points, respectively. Currently, Total and Equinor’s short interest is 0.04% and 0.12%, respectively. YPF’s short interest has fallen by 1.09 percentage points since June 10 to the current level of 2.11%.

Since June 10, Total, Equinor, and YPF’s stock prices have risen 5.5%, 0.4%, and 18.0%, respectively. The rise shows that these stocks and their short interests have moved inversely in the past month.


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