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Is Shell Better Placed than Its Peers for 2020?

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Royal Dutch Shell (RDS.A) (RDS.B) stock has risen marginally by 0.9% YTD (year-to-date). Overall, 2019 hasn’t been great for the stock. The stock’s dull performance is due to lower oil prices impacting the company’s earnings.

ExxonMobil (XOM), Chevron (CVX), and BP (BP) stocks have also risen by 3.1%, 10.6%, and 0.5% in the current year. Total SA and Suncor Energy stocks have increased by 5.5% and 16.1%, respectively, YTD. The equity markets have also risen to all-time highs in the current year. The S&P 500 Index has increased by 28.5% in the current year.

Earlier in the year, the trade tension between the US and China raised concerns about economic growth. However, the business conditions seem to be improving. Although there’s still uncertainty regarding trade talks, the tension has eased with phase one of the deal.

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The deal has also reduced the fear of a trade war on oil demand growth. Supply-side restrictions with production cuts from OPEC and its allies have supported oil prices. OPEC decided to deepen its cuts in a bid to stabilize the global oil markets. These events have also fueled a positive outlook for the next year. Wall Street analysts have started raising their oil price estimates for 2020.

Shell’s earnings outlook for 2020

Wall Street analysts expect Shell’s EPS to rise by 21% in 2020. The growth rate is higher than the peer average, which stands at 17%. In the next year, analysts expect Shell’s earnings to be better than Chevron, BP, and Total SA. However, they expect Shell’s earnings to be less than ExxonMobil’s earnings growth.

Analysts expect Chevron, BP, and Total’s EPS to rise by 8%, 14%, and 18%, respectively, in 2020. However, they expect ExxonMobil’s earnings to rise by 42% in the next year. Analysts’ positive outlook on oil companies’ growth is based on improving upstream and downstream environments.

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Shell’s upstream outlook

Shell’s upstream earnings depend on oil prices. With most analysts expecting better oil prices in the next year, the company could see higher upstream earnings.

In 2019, WTI oil prices have risen by 33.5%. However, on average, they’re still about 12.2% lower than the previous year. WTI price has held at $57 per barrel in the current year. Next year, J.P. Morgan expects WTI prices to rise to $60 per barrel. Although the increase is marginal, it’s better than a decline in oil prices.

Besides, Shell’s crude oil and natural gas output could support the company’s upstream earnings. In the first nine months, the company’s global hydrocarbon output rose by 0.2% to 3.6 MMboed (million barrels of oil equivalent per day). In comparison, Chevron, ExxonMobil, and BP’s production grew by 6.0%, 4.1%, and 4.2%, respectively, to 3.1, 3.9, and 2.6 MMboed in the same period.

Shell has a strong pipeline of upstream projects. The company expects seven new projects to start in 2019–2020. Shell expects the projects to add 250 Mboed (thousand barrels of oil equivalent per day) of new oil and gas production. The company expects 300 Mboed of more output from 14 other projects, which will start in 2021 and later. The company also has a massive list of projects that are under the pre-FID phase. These projects could add over 1,000 Mboed of new production for Shell.

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Robust downstream conditions

The refining environment is strengthening due to the upcoming IMO 2020. Shippers will be required to use low-sulfur fuels starting in January. The shipping industry accounts for a notable portion of refined fuels’ demand. So, any changes in the shipping sector’s demand have a drastic impact on the refining industry.

Refiners could use sweet or sour crude oil to produce low-sulfur fuels. Notably, refiners who can refine sour crude oil will benefit the most from the changing environment. They will benefit from cheaper sour crude oil and higher refined product prices. However, they will have to invest substantially in refining units. Besides, ships that have scrubbers on board could be open to buying high-sulfur fuel.

Shell seems well-positioned for IMO 2020. The company has developed a wide range of fuels for the shipping industry. According to Shell, the fuels include “marine gasoil… and very low sulphur fuel oil… supply in key bunker ports; high sulphur fuel oil… supply for ships with on-board scrubbers; and liquefied natural gas…” Shell said, “The market will continue to need multiple types of fuel to meet the industry’s demand, such as LNG, 0.10%S, DMA, and 3.50%S for ships with scrubbers. Shell will provide multiple products at key ports.”

Due to changing dynamics, refining cracks and oil spreads have widened in the current quarter. The conditions could continue to prevail through the first half of the next year until the dust surrounding IMO 2020 settles. Shell could benefit from these strengthening downstream conditions.

Overall

Shell could witness better upstream and downstream earnings in the next year. The higher oil price outlook and better refining conditions could support the company’s profits in 2020. Also, the company’s ability to produce more hydrocarbons and tap into the IMO 2020 demand will likely boost analysts’ sentiments. As a result, analysts expect Shell’s earnings to rise more than its peers in the next year.

Read Analysts’ Views: Is Shell a Better Buy than BP Stock? to learn more.

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