Will Shell’s Q2 Earnings Outperform Peers?

Shell’s Q2 earnings

Royal Dutch Shell (RDS.A) plans to release its second-quarter results on August 1. Shell’s Q2 earnings are expected to rise year-over-year. Before we review the second-quarter estimates, let’s recap Shell’s first-quarter performance compared to forecasts.

Will Shell’s Q2 Earnings Outperform Peers?

Shell’s revenues at $83.7 billion fell short of analysts’ estimate in the first quarter. However, in the quarter, Shell’s adjusted EPS of $1.30 beat analysts’ estimate of $1.05 by ~24%.

Shell’s reported income rose from $5.9 billion in Q1 2018 to $6.0 billion in Q1 2019. However, in the first quarter, Shell’s adjusted earnings fell 2% YoY to $5.4 billion. The fall was driven by a rise in corporate expenses led by lower tax credits. However, upstream, integrated gas, and downstream earnings rose in the first quarter. To learn more, read Shell’s Q1 Earnings Beat Estimates, Segmental Earnings Rose.

Shell’s Q2 earnings estimates

Shell is estimated to post EPS of $1.25 in Q2 2019, which is about 12% YoY higher but 4% lower quarter-over-quarter. Shell’s revenues are expected to be around $84.1 billion in Q2 2019, about 13% lower than its Q2 2018 revenues.

Shell’s Q2 earnings look better than most peers. Chevron (CVX) and BP (BP) are expected to post 6% and 1% higher YoY EPS in the second quarter. However, ExxonMobil (XOM), Total (TOT), and Petrobras’s (PBR) earnings are expected to fall 7%, 2%, and 27% YoY, respectively.

Lower oil prices, partly offset by better volumes, could impact Shell’s upstream earnings. However, downstream earnings could be positively affected by stronger refining cracks year-over-year partly offset by weaker oil spreads.

First-quarter segmental review

We’ll analyze Shell’s (RDS.A) segmental earnings in the first quarter and then move on to Shell’s second-quarter segmental earnings expectations.

Will Shell’s Q2 Earnings Outperform Peers?

Upstream  in Q1

Shell’s upstream earnings rose 11% YoY in the first quarter, led by higher volumes and lower operating costs. Shell’s upstream production grew 1% YoY due to more output from North American assets and the transfer of the Salym asset from the integrated gas segment. Lower liquid realizations partially offset the higher earnings. The liquid realizations fell from $61 per barrel in the first quarter of 2018 to $57 per barrel in the first quarter.

Shell’s peer Chevron’s (CVX) adjusted Upstream segment’s earnings fell from $3.4 billion in the first quarter of 2018 to $3.3 billion in the first quarter. ExxonMobil’s (XOM) upstream earnings fell from $3.5 billion in the first quarter of 2018 to $2.9 billion in the first quarter. BP’s (BP) upstream adjusted EBIT fell from $3.2 billion in the first quarter of 2018 to $2.9 billion in the first quarter. Total’s (TOT) exploration and production adjusted operating earnings fell 5% from the first quarter of 2018 to $1.7 billion in the first quarter.

Other segments in Q1

Shell’s integrated gas earnings rose 5% YoY due to higher LNG (liquefied natural gas) and natural gas realizations. However, the integrated gas segment’s production fell 12% YoY due to the Salym asset transfer (to the upstream segment) and divestments. Overall, in the first quarter, Shell’s total hydrocarbon production fell 2.3% YoY to 3.75 MMboed (million barrels of oil equivalent per day). ExxonMobil (XOM), Chevron (CVX), and BP’s (BP) upstream volumes stood at 3.98, 3.04, and 2.66 MMboed, respectively, in the first quarter.

The company’s downstream earnings rose 3% YoY due to higher oil product earnings, which included refining and trading and marketing earnings. Oil products’ earnings rose due to higher trading activities, partially offset by lower margins. However, lower chemicals earnings impacted Shell’s downstream earnings.

Shell’s Q2 earnings: segment-wise outlook

In the second quarter, Shell’s upstream realizations are expected to be weaker. However, higher upstream volumes could partially offset the impact of lower oil prices.

In the second quarter, oil prices have fallen, and their quarterly average stands lower year-over-year. Brent and WTI prices, which stood at $75 per barrel and $68 per barrel, respectively, in Q2 2018, fell to $69 per barrel and $60 per barrel, respectively, in Q2 2019. Also, Henry Hub natural gas prices fell by 11% YoY to $2.5 per MMBtu in the second quarter. A fall in oil and natural gas prices could impact Shell’s upstream and integrated gas earnings in Q2 2019.

According to Shell’s guidance, in the second quarter, its upstream production is expected to rise by 150 to 200 Mboepd (thousand barrels of oil equivalent per day) YoY, which would be driven by the transfer of its Salym asset to the Upstream segment, new field ramp-ups, and lower turnaround activities partly offset by divestment and field declines. However, integrated gas volumes are expected to be hit by divestments and the transfer of the Salym asset. Integrated gas output is anticipated to be lower by ten to 50 Mboepd YoY in Q2. LNG liquefication volumes are estimated to be almost the same as the previous year.

Shell’s earnings from its Downstream segment are likely to rise, as cracks have expanded in Q2 2019 compared to Q2 2018. For example, the industry crack, the US Gulf Coast WTI 3-2-1, has widened by 9% year-over-year to $20 per barrel in Q2 2019. However, lower oil spreads have narrowed, which could impact Shell’s downstream earnings.

Wall Street ratings

Will Shell’s Q2 Earnings Outperform Peers?

Of the 11 Wall Street analysts that cover Shell, ten (or 91%) analysts have assigned “buy” or “strong buy” ratings, and one has given a “hold” rating.

Also, Chevron (CVX), Petrobras (PBR), and BP (BP) have “buy” ratings from 74%, 73%, and 45% of analysts, respectively. Other integrated firms YPF (YPF), Total (TOT), and ExxonMobil (XOM) have “buy” ratings from 85%, 100%, and 27% of analysts, respectively. Wall Street analysts favor Shell likely due to its strengthening debt and liquidity position and earnings model efficiency.

Improving financials

Shell’s net debt-to-EBITDA ratio fell in the past four quarters, indicating an improvement in the company’s debt position. Shell has stayed focused on its first cash priority of debt reduction.

In the first quarter of 2019, the company’s cash flow from operations of $8.6 billion stood $0.4 billion lower than its combined capex and dividend outflows. However, Shell had sufficient cash reserves to fund the deficit. The company’s strict cost and capital strategy and focus on its core competitive assets could soon turn its operating cash flows to a surplus. Perhaps Shell’s higher cash reserves drove the company’s share buyback plan.

Better earnings model

Further, Shell has an effective earnings model. While Shell’s total earnings fell marginally in the first quarter, its segmental earnings rose. The company’s integrated gas, upstream, and downstream earnings rose despite lower oil prices, weaker refining margins, and narrower chemical margins in the first quarter. The growth in Shell’s segmental earnings was led by higher natural gas and LNG prices and more refining trading activities.

The rise in Shell’s segmental earnings point towards the capability of the earnings model that the company has built over the years. Shell has restructured its portfolios only to keep competitive assets. The effect of the restructuring exercise was visible in the company’s first-quarter earnings. Shell’s segmental earnings grew despite challenging business conditions. Shell’s strategy to decrease costs, optimize capex, sell non-core assets, and deliver new projects within the budget supported the earnings. To learn more, read Shell: Stronger in Q1 Due to Its Strategy.

Thus, most analysts like Shell due to its robust earnings model, strengthening financials, and strong growth prospects. Shell is one of the few companies expected to post a rise in earnings in the current year. Wall Street analysts expect Shell’s earnings to rise by 8% in 2019.