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Shell Stock: Has RDSA Built a Reliable Business Model?


Dec. 2 2019, Published 7:52 a.m. ET

Royal Dutch Shell (RDS.A) stock has been pressured this quarter, falling by 2.3% so far. Meanwhile, energy peers ExxonMobil (XOM), Chevron (CVX), and BP (BP) have fallen 3.5%, 1.2%, and 1.5%, respectively.

Companies’ third-quarter earnings, hit by lower oil prices, have hurt these stocks. Oil prices are important factors for energy companies, as they affect their upstream earnings.

Furthermore, given oil markets’ weak fundamentals, oil prices could remain subdued over the next year as well. In such a scenario, an integrated earnings model is vital for big oil companies. Shell has strived to create an integrated business. The oil giant’s acquisition of BG Group and portfolio improvement through focusing on divestments and capex have created a robust, competitive, and diversified earnings model.

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Shell stock: The company’s business segments

Royal Dutch Shell has three main business segments: upstream, downstream, and integrated gas. While its upstream earnings are from crude oil and natural gas exploration and production, its downstream earnings are from refining oil and gas to produce and sell petroleum and chemical products. Its integrated gas segment deals with natural gas production and LNG (liquefied natural gas) processing and sales.

Therefore, crude oil, natural gas, and LNG prices impact the company’s upstream and integrated gas earnings. These segments strengthen with higher prices and weaken with lower prices. Meanwhile, the company’s downstream earnings depend on its refining margin, marketing margin, throughput, and trading activities.

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Shell stock: Segments’ performance in Q3

In the third quarter, Shell’s upstream earnings fell 52% YoY (year-over-year), and its integrated gas and downstream earnings rose 17% and 7% YoY, respectively. Lower oil, gas, and LNG prices impacted the company’s upstream and integrated gas earnings.

However, stronger trading activity and volumes in the integrated gas segment supported the segment’s earnings. In the third quarter, Shell’s LNG liquefication and sales volumes rose by 9% YoY each. Also, its downstream earnings rose due to higher trading activity in refining. Meanwhile, better lubricant, aviation, and retail margins supported Shell’s marketing earnings.

Has Shell created an integrated earnings model?

In the third quarter, Shell’s upstream share of its total earnings shrunk YoY to 18% from 33%, due to the segment’s earnings falling. Its downstream contribution expanded YoY to 44% from 35%, and its integrated gas contribution expanded YoY from 40% to 54%.

Therefore, Shell’s integrated gas and downstream earnings supported its total earnings amid lower oil prices, demonstrating the strength of its integrated earnings model. The model can generate profits for the company amid both weak and strong oil prices, refining margins, and chemical margins.

Management’s views

During Shell’s third-quarter conference call, management spoke about the strength of its earnings model. Shell CFO Jessica Uhl said, “Last quarter we continued to deliver strong cash flow and earnings. This is despite continued weak oil and gas prices, and chemicals margins. We have seen the value potential of one of our core strengths—trading and optimisation—which allowed us to capitalise on the market conditions last quarter. This has resulted in very strong performance in both Integrated Gas and Downstream.” She added, “We have also seen our resilient Marketing businesses generate strong returns last quarter, showing the strength of our scale, brand and customer offering.” To learn more about Shell, read Analysts’ Views: Is Shell a Better Buy than BP Stock?


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