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Shell (RDS.A) Gears Up for Q2 Earnings: What's in the Cards?

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Royal Dutch Shell plc (RDS.A - Free Report) is set to announce second-quarter 2018 results on Jul 26 before the opening bell.

In the preceding three-month period, the Hague-based supermajor reported better-than-expected results, courtesy of rebounding oil prices and continued improvement of its integrated gas unit.

As it is, the Anglo-Dutch energy company has an impressive earnings surprise history. The supermajor surpassed earnings estimates in each of the last four quarters, with an average positive earnings surprise of 10.15%.

Investors are keeping their fingers crossed, in expectation of the Anglo-Dutch giant beating earnings estimates this time as well. The Zacks Consensus Estimate of $1.38 for the second quarter has been revised upward by 10 cents in the past seven days. This reflects a year-over-year increase of 56.1%.

Let’s delve deeper into the factors that are likely to influence Shell’s earnings in the to-be-reported quarter.

Factors at Play

Average West Texas Intermediate (WTI) crude prices were recorded at $66.25, $69.98 and $67.87 per barrel for the month of April, May and June 2018, respectively, per data from the U.S. Energy Information Administration (EIA). These prices were considerably higher than the year-ago respective prices of $51.06, $48.48 and $45.18. Shell’s upstream segment is likely to benefit from higher crude price realizations.

Shell’s $50-billion buyout of BG Group boosted its strong and diversified portfolio of global energy businesses that offer attractive long-term growth opportunities. In the last reported quarter, the company’s integrated gas earnings more than doubled on the back of production and pricing gains.

Moreover, Shell’s downstream segment is likely to record improved results, as the crack spread widened around 20% in the second quarter of 2018 compared with the year-ago period. This is likely to improve year-over-year refining margins, thereby boosting downstream income. In a bid to generate double-digit returns and maximize the value of its downstream segment, Shell 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 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 the downstream segment, forecasting a return on average capital employed (ROACE) of more than 15%.

During the quarter, the European oil giant completed various divestment deals, including the sale of Thai gas Field and Malaysian LNG Tiga among others, which are expected to boost the company’s financials. In the last reported quarter, the company raked in $5,178 million of free cash flow. The trend is expected to continue and drive the company’s financials as well.

Though these deals will strengthen financials and credit metrics of the company, it might affect volume growth adversely. In the last reported quarter, Shell’s oil and gas production declined both on a sequential as well as year-over-year basis. In fact, since the past several quarters, it has been bearing the brunt of reduced volumes. If the trend continues, the company’s results in the to-be-reported quarter may be impacted.

Earnings Whispers

Our proven model does not show that Shell is likely to beat estimates in the to-be-reported 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.

Earnings 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 $1.38.

Zacks Rank: Shell currently holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. Though a Zacks Rank #2 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.

Stocks Poised to Beat Earnings Estimates

While earnings beat looks uncertain for Shell, one can consider some stocks from the energy space that have the right combination of elements to beat estimates in the to-be-reported quarter:

Exxon Mobil Corporation (XOM - Free Report) has an Earnings ESP of +1.09% and a Zacks Rank #3. The integrated supermajor is anticipated to report second-quarter earnings on Jul 27.

Cabot Oil and Gas (COG - Free Report) has an Earnings ESP of +3.34% and carries a Zacks Rank #3. The upstream player is expected to announce second-quarter results on Jul 27.

Marathon Oil Corporation (MRO - Free Report) has an Earnings ESP of +2.27% and sports a Zacks Rank #1. The company is anticipated to report second-quarter earnings on Aug 1.

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