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Shell (RDS.A) Bolsters Outlook for Downstream Segment

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Royal Dutch Shell plc RDS.A recently released a statement updating its downstream segment’s outlook, bringing in pleasant news for the investors. Post the announcement, shares of the Anglo-Dutch giant have moved up 2.04% to eventually close at $63.48 on Mar 21. The European supermajor now expects strong growth in its downstream segment over the coming years.

The company’s downstream segment — comprising refining, marketing/retail and chemical business — reported adjusted income of around $1.4 billion in the last quarter, reflecting a year-over-year increase of more than 4% on the back of improving refining environment and higher marketing contribution.

Adapting to the changing times, Shell is successfully reorienting and re-strategizing its business to de-carbonize the energy system. In a bid to generate double-digit returns and maximize the value of its downstream segment, the company is focused on streamlining its portfolio by divesting various projects including Motiva JV, Showa Shell and SADAF petrochemicals. Meanwhile, it is concentrating on modernizing and upgrading its refineries by using superior technologies to derive high-value light products. As such, it is poised for a competitive downstream portfolio, helping the company ride out commodity price fluctuations.  

Shell plans to make a yearly investment of around $7-$9 billion in its downstream segment, forecasting a return on average capital employed (ROACE) of more than 15%. The company now forecasts to generate annual organic free cash flow of about $6-$7 billion for its downstream segment by 2020, in line with its prior guidance. It additionally updated its estimates for 2025, aiming to generate $9-$12 billion in annual free cash flow in its downstream business by 2025.

The marketing unit, accounting for almost half of Shell’s total downstream unit, is expected to generate more than $1 and $2.5 billion in annual earnings by 2020 and 2025, respectively, with an average annual growth rate exceeding 7%.

Annual earnings in its retail division is also likely to grow to $4 billion by 2025 (versus 2.2 billion in 2017), on geographical expansion by tapping in fast-growing markets, premium fuels and lubricants, increase in convenience stores, along with digital and e-mobility services.

Shell also aims to reduce its refining integrated margin and improve operational excellence to create more value in the refining division.  

The Chemicals business, which had a record year in 2017, is a strong growth priority and set to be the driving factor for the downstream business of the company. The company estimates to generate more than $3.5-$4 billion annually in its Chemicals division by 2025, on the back of increased global demand for petrochemicals that is expected to grow at least 3% per year.

Additionally, the division is also set to get a boost from annual capital investment of around $3-$4 million in world-scale projects including local cracker plants, among others. The company’s $6 billion ethane cracker plant in Potter Township will come online by early next decade, generating substantial revenues for Shell. The Alpha olefins and Pernis solvent deasphalting expansion projects in the Netherlands also bode well for the Chemical unit.

Shell has had an impressive run on the bourse over a year and possesses a great potential to continue its momentum forward. Shell’s shares have returned 20.8% in a year, outperforming 13.1% gain of the industry it belongs to. The company carries a Zacks Rank #2 (Buy).

Other top-ranked players in the energy space include Concho Resources Inc. , Pioneer Natural Resources Company PXD and Continental Resources, Inc. CLR, each sporting a Zacks Rank #1 (Strong Buy).

Concho Resources topped earnings estimates in each of the last four quarters, with an average of 48.89%.

Pioneer Natural surpassed earnings estimates in each of the trailing four quarters, with an average of 66.92%.

Continental Resources delivered an average positive earnings surprise of 64.93% in the preceding four quarters.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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