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On Aug 14, Zacks Investment Research downgraded Europe’s largest oil company Royal Dutch Shell plc (RDS.A - Analyst Report) to a Zacks Rank #4 (Sell).

Why the Downgrade?

On Aug 1, 2013, Royal Dutch Shell reported weak second-quarter 2013 results, due to high costs, supply disruptions in Nigeria and lower refining margins. Earnings per ADR (on a current cost of supplies basis) – excluding one-time items and gains or losses from inventories – came in at $1.46, well below the Zacks Consensus Estimate of $1.87 and also down from the year-ago adjusted earnings per ADR of $1.83.

Moreover, adjusted earnings from the upstream operations of Royal Dutch Shell during the second quarter of 2013 fell significantly by 22.2% to $3.5 billion from $4.5 billion in the year-ago period. The downfall was primarily owing to the impact of lower liquids realizations, higher depreciation and exploration expenses, increased operating costs, the tax effect of a depreciating Australian currency, and output disruptions in Nigeria.

Additionally, from the downstream operations, the Anglo-Dutch super-major recorded an adjusted profit of $1.2 billion against $1.3 billion in the year-ago period. The negative comparison reflects the impacts of lower refining profitability, deteriorating oil product sales volumes and softer Chemical earnings.  

As Royal Dutch Shell conducts operations in many countries it is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.

As a result of these bearish factors, the tendency for a downward estimate revision has been obvious in recent times. In fact, the Zacks Consensus Estimate for the third quarter has decreased by 9.0% to $1.83 per ADR, over the last 30 days.

Stocks to Consider

Not all energy firms are performing as poorly as Royal Dutch Shell. The stocks of Magellan Midstream Partners LP (MMP - Analyst Report), Dril-Quip Inc. (DRQ - Analyst Report) and Range Resources Corporation (RRC - Analyst Report) are worth considering. All these stocks carry a Zacks Rank #1 (Strong Buy).

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