Shell’s 3Q’16 To Witness A Jump Backed By The Recovery In Commodity Prices
With a gradual recovery in the commodity markets over the last few months, the market predicts Royal Dutch Shell Plc. (NYSE:RDSA), one of the major integrated oil and gas companies, to report an improvement in its September quarter earnings, due for release on 31st of October 2016 [1]. This could lead to an uptick in the company’s stock price, which has dropped from the 52-week high of $56 per share in July to around $50 per share at present, owing to the company’s poor second quarter results.
Source: Google Finance; US Energy Information Administration (EIA)
Despite the rebound in commodity prices, Shell’s last quarter revenues suffered largely because of unexpectedly weak downstream margins realized by the company, partly mitigated by the integration of BG Group results in the quarter. However, in the last three months, commodity prices, particularly natural gas, have shown resilience. Natural gas prices, measured by the global benchmark Henry Hub gas prices, recovered almost 35% in the third quarter, while crude oil prices remained pretty much flat during the same period. Since Shell has a significant presence in the natural gas market, the recovery in the gas prices is likely to have a positive impact on the company’s price realization, and in turn, its top line growth in this quarter. However, the revenue for the quarter may remain depressed compared to the same quarter last year, since the commodity prices continue to be much lower compared to a year ago.
Source: US Energy Information Administration (EIA)
On the cost side, Shell has been working hard to bring down its operating costs to sustain its operating margins in the current downturn. The company has a target of reducing its operating costs by $4 billion in 2016. In the first half of the year, the company had managed to curb about $2 billion of its costs and is on track to achieve its targeted cost savings for the year. Thus, we believe that the integrated company’s 3Q’16 earnings will witness an improvement backed by these planned cost savings.
Apart from this, Shell has other levers, such as capital spending, divestment program, and a strong pipeline of new projects, that it plans to pull in order to enhance its performance in the ongoing down cycle. For instance, the oil and gas giant aims to cut its capital expenditure from $36 billion in 2015 to around $29 billion in this year, subject to the recovery in the commodity prices. Further, to fund this capital spending program, the company plans to divest some of its non-core and non-strategic assets in the next couple of years. So far in 2016, the energy company has closed sales worth $1.5 billion and has announced deals worth $2 billion that are likely to be closed by the end of the year. For the full year, Shell targets to complete divestitures of $6-8 billion.
Finally, Shell has a robust portfolio of projects that are expected to come on-stream in the next couple of years. These projects are estimated to have a cash cost of less than $15 per barrel of oil equivalent (boe) and could enable the company to deliver higher margins than its ongoing projects. Thus, the company expects these projects to add approximately $2 billion to the company’s cash flows by the end of this year.
Shell’s Target For 2016
Have more questions about Royal Dutch Shell (NYSE:RDSA)? See the links below:
- Shell’s Growth Priority Over The Next Five Years – Chemicals
- Shell’s Growth Priority Over The Next Five Years – Deepwater
- How Significant Is Shell’s Footprint In The LNG Market?
- How Much Value Does Shell’s Upstream Operations Contribute To Its Total Equity Value?
- How Will Shell’s Upstream Production Change In The Next Five Years?
- Here’s Why We Think Shell’s Stock Price Is Worth $53 Per Share
- Shell’s 2Q’16 Earnings Expected To Suffer As Commodity Prices Remain Depressed
- What Is Shell’s Strategy To Combat The Commodity Downturn Over The Next Two Years?
- How Will Shell’s Revenue Be Impacted If Crude Oil Prices Average At $50 Per Barrel Till 2018?
- How Will Shell’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- Why Are Shell’s Upstream Operations More Important Than Its Downstream Operations?
- How Much Value Will The BG Group Acquisition Add To Royal Dutch Shell?
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Royal Dutch Shell
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Notes:- Royal Dutch Shell To Announce Third Quarter 2016, 3rd October 2016, www.shell.com [↩]