Will Shell’s Earnings Recover from a Two-Year Low?

Royal Dutch Shell’s earnings fell to a two-year low in the second quarter. Energy companies have faced tough business conditions in the third quarter.

Shell plans to release its third-quarter results on Thursday. Analysts expect Shell’s earnings to fall YoY (year-over-year) in the third quarter. However, let’s find out whether the earnings will be better than the second-quarter earnings.

Shell’s earnings estimates

Analysts expect Shell to post an EPS of $0.99 in the third quarter.

Will Shell’s Earnings Recover from a Two-Year Low?

Shell’s estimated EPS is about 26% lower YoY, but 18% higher sequentially. So, although analysts expect Shell’s earnings to fall compared to last year, they expect it to recover from the two-year low seen in the second quarter. Shell’s revenues will likely be around $73.7 billion in the third quarter—about 26% lower than its revenues in the third quarter of 2018.

The company’s third-quarter earnings look better than most of its peers. Analysts expect ExxonMobil (XOM) and Chevron’s (CVX) earnings to fall 54% and 31% YoY. BP (BP), which posted its results on Tuesday, saw a 41% YoY drop in its earnings in the third quarter. To learn more, read BP’s Q3 Earnings Slump but Beat the Estimate.

In the previous quarter, Shell’s earnings per ADS, on an adjusted basis, were $0.84. The earnings missed analysts’ estimate of $1.23. In the past few quarters, the company beat its earnings estimate. However, Shell’s revenues at $90.5 billion beat analysts’ estimate of $84.1 billion in the second quarter.

Upstream earnings forecast

Lower oil and natural gas prices could impact Shell’s upstream and integrated gas earnings in the third quarter. WTI prices fell 19% YoY to $56 per barrel in the quarter. Also, Henry Hub natural gas prices fell 19% YoY to $2.3 per MMBtu in the third quarter.

According to Shell’s guidance, its upstream production volumes will likely be 2,600 Mboepd–2,650 Mboepd (thousand barrels of oil equivalent per day) in the third quarter. The company’s guidance is lower than its production of 2,672 Mboepd in the third quarter of 2018. Lower volumes reflect field declines and divestment. The weaker upstream output could aggregate the impact of lower oil prices on the segment’s performance.

Also, Shell expects its integrated gas volumes to be between 930 Mboepd and 960 Mboepd in the third quarter. The guided production is higher than the company’s volumes last year.

So, the company expects its total hydrocarbon production to be between 3,530 Mboepd and 3,610 Mboepd in the third quarter. In the third quarter of 2018, Shell’s production was 3,596 Mboepd. So, the company expects its total output to be almost flat YoY or see marginal up or down movement.

Overall, Shell’s upstream earnings could fall YoY due to lower realizations and flat volumes.

Shell’s downstream expectation

Shell expects its refining availability to be 90%–92% in the third quarter. However, the company’s refining availability was 92% in the third quarter of 2018. So, Shell could see flat or lower throughputs YoY in the third quarter.

The refining cracks have been flat, while the oil spreads have narrowed in the third quarter. Shell expects higher oil product sales volumes due to trading activities.

Second-quarter recap

Shell’s earnings fell almost 50% YoY to $3.0 billion in the second quarter. The company’s profits, on an adjusted basis, fell 26% YoY to $3.5 billion—the lowest level since the first quarter of 2017. Shell’s earnings fell across its business segments in the quarter.

The company’s downstream earnings fell 19% YoY due to a loss in the refining and trading segment and a 76% YoY decline in the chemical segment’s earnings. While weaker US Gulf Coast and Europe margins impacted Shell’s refining earnings, lower chemical margins and volumes impacted the chemical earnings. However, the company’s marketing earnings increased 24% YoY in the quarter due to better retail margins.

Further, Shell’s upstream earnings fell 8% YoY due to lower realizations. The earnings were partially offset by higher volumes. Shell’s upstream output rose 7% YoY due to higher production from North America. However, declines and divestments impacted the segment’s production.

Shell’s integrated gas earnings fell 25% YoY due to lower natural gas, LNG, and liquids realizations. The segment’s hydrocarbon production fell 3% YoY due to divestments and the transfer of the Salym asset to the upstream segment.

Markets and analysts reacted negatively

Shell stock (RDS.A) (RDS.B) fell 7% due to its second-quarter earnings miss. After the earnings, CFRA downgraded the stock and lowered its target price. Credit Suisse also cut its target price on Shell stock.

Stock performance

So far in October, Shell stock has risen 1.3% in anticipation of the earnings. Also, a recovery in oil prices and better equity markets supported the stock. The S&P 500 Index (SPX) has risen 2.2%, while WTI has risen 2.7% during the same period.

Total (TOT) stock has risen 1.3% in October. However, ExxonMobil, Chevron, and BP stocks have fallen 3.1%, 0.4%, and 0.2%, respectively, during the same period. So far, Suncor Energy (SU) has fallen 4.1% month-to-date.