Shell (RDS.A) Warming Up To Q4 Earnings: What's In Store?

Royal Dutch Shell (LON:RDSa) plc RDS.A is set to release fourth-quarter 2017 results before the opening bell on Feb 1.

In the preceding three-month period, The Hague-based supermajor reported better-than-expected results courtesy of rebounding oil prices and successful cost-containment efforts.

The Anglo-Dutch energy company has a mixed history when it comes to beating earnings estimates. The supermajor has surpassed earnings estimates in two of the last four quarters, with an average miss of 0.87%.

Royal Dutch Shell PLC Price and EPS Surprise

Royal Dutch Shell PLC Price and EPS Surprise | Royal Dutch Shell PLC Quote

Which Way are Estimates Treading?

Let’s look at the estimate revisions in order to get a clear picture of what analysts are thinking about the company before earnings release.

The Zacks Consensus Estimate of $1.02 for the current-quarter earnings has been revised upward by 9 cents over the last seven days. It reflects growth of about 132% from the year-ago quarter.

Factors at Play

Shell’s $50-billion buyout of BG Group has boosted its strong and diversified portfolio of global energy businesses that offers promising long-term growth opportunities.

Prices of oil at the end of the fourth quarter were $60.46 per barrel, up about 19.6% sequentially amid tightening supplies, improving demand outlook and OPEC-deal extension talks. The upstream segment of Shell is likely to benefit from higher price realizations.

We also appreciate the company’s cost-reduction initiatives and efficiency gains. Last quarter, Shell raked in $3,670 million in free cash flow as against $3,324 million a year ago. The trend is expected to continue and drive the financials of the company. The remodeling of portfolio and strategies made the firm more resilient to reduced crude prices,reducing its break-even point to $47 a barrel currently.

Though recovering oil prices bode well for the company’s upstream segment,we remain a bit concerned of Shell’s production volume. Royal Dutch Shell saw its third-quarter oil and gas production decline sequentially as well as from the year-ago period.

Lately, Shell has entered into various divestment deals to reduce debts. During the fourth quarter, Shell completed the sale North Sea and Gabon Onshore assets for $3.8 billion and $628 million, respectively. Although these deals will strengthen the credit metrics of the company, it might affect the volume growth adversely.

Earnings Whispers

Our proven model does not conclusively show that Shell will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at $1.02.

Zacks Rank: Shell currently flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.Though a Zacks Rank #1 increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Conversely, we caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Share Performance

Shares of Europe’s largest oil company, Shell — whose peers include Exxon Mobil Corporation (NYSE:XOM) , Chevron Corporation (NYSE:CVX) and BP (LON:BP) among others — have rallied 10.1% during the fourth quarter outperforming the industry’s 6.6% gain.

Energy Stock with Favorable Combination

Though earnings beat looks uncertain for Shell according to our model, another stock from the same industry — TOTAL S.A. (NYSE:TOT) — has the right combination of elements to post an earnings beat this quarter.

TOTAL has an Earnings ESP of +33.32% and a Zacks Rank #2. The company is expected to release fourth-quarter earnings results on Feb 8.

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