What To Expect From Royal Dutch Shell’s 4Q’16 Earnings?
With the earnings season in full swing, the market expects Royal Dutch Shell (NYSE:RDS.A) to post an extraordinary improvement in its December quarter performance on 2nd February 2017((Royal Dutch Shell To Announce December Quarter 2016 Results, 3rd January 2017, www.shell.com)), on the back of a strong rebound in commodity prices over the last few months. The Netherlands-based company had reported a sharp rebound in the previous quarter as well, driven by the same reason. However, based on the lower-than-expected performance announced by Chevron and Exxon Mobil, we believe that the market is overestimating the impact of the revival in commodity prices. Accordingly, while we expect Shell to witness a notable improvement in its earnings for the fourth quarter, the company might miss the consensus estimate.
The integrated energy company’s stock has witnessed a jump of almost 20% in the last twelve months, primarily due to the Organization of Petroleum Exporting Countries’ (OPEC) decision to cut its combined oil production by 1.2 million barrels per day (Mbpd) over the next few quarters. As a result, commodity prices bounced back sharply during the quarter, with WTI crude oil prices rising more than 10% to $49.21 per barrel in the December quarter, and Henry Hub natural gas prices increasing by more than 30% to $3.71 per Mcf in the same period. Given this recovery in commodity prices, Shell is likely to see a steep rise in its upstream price realizations that will lift the company’s revenues for the quarter.
Data Source: Google Finance; US Energy Information Administration (EIA)
Further, the European energy company announced that it started oil production from the Malikai Tension-Leg Platform (TLP), which is Shell’s second deepwater project in Malaysia. The project is likely to produce oil at a much lower cost, due to the use of a cost-effective platform design and industry-first set of risers or pipes. The project, which is a joint venture between Shell (35%, operator), ConocoPhillips Sabah (35%), and PETRONAS Carigali (30%), is expected to have a peak production of 60,000 barrels per day. With the commercial production from this project, Shell is expected to witness a sharp rise in its oil output in the coming years.
On the cost front, Shell continued to progress towards its objective of reducing its operating costs by $9 billion by the end of 2016 compared to the consolidated costs of Shell and BG in 2014. At the end of the September quarter, the company had realized its target ahead of schedule. Based on the company’s track record, we expect to see further cost savings in this quarter, leading to an improvement in the company’s operating income and margins.
Besides this, Shell has been working towards streamlining its existing portfolio by divesting its non-core or non-strategic assets and focusing on its more profitable downstream operations. At the end of the third quarter, the energy company had closed sales worth $1.5 billion, as opposed to its target of $6-8 billion. Consequently, the last quarter saw a series of asset sales by the oil and gas major including the sale of Shell Aviation Australia Pty Ltd. to Viva Energy Australia Pty Ltd. for a sum of $250 million, the sale of a 31.2% shareholding in Showa Shell Sekiyu K.K. to Idemitsu Kosan Co. Ltd. for a total amount of roughly $1.4 billion, and the sale of majority stake in the Shell Refining Company in Malaysia to Malaysia Hengyuan International Limited (MHIL) for $66.3 million.
In fact, the oil and gas company has extended its divestment program to the new year, and has already closed a few deals in January 2017. These deals include the sale of its 50% stake in the petrochemicals SADAF joint venture to SABIC, a Saudi Arabia based manufacturing company, for a total of $820 million, the sale of roughly 22.22% stake in Bongkot field for a consideration of $900 million, and the sale of a package of UK North Sea assets to Chrysaor for a sum of $3.8 billion. At this pace, we expect the company to comfortably achieve its target of $30 billion worth of asset sales between 2016 and 2018.
Apart from controlling its operating costs, Shell aims to restrict its 2016 capital spending to $29 billion, close to 20% less compared to 2015, to better manage its finances. For 2017, the company plans to keep its capital expenditure budget at $25 billion, lower from its previous guidance of $25-$30 billion. For the remaining years of this decade, the integrated energy company targets to spend $25-$30 billion on capital development. Lower capital expenditure will enable the company to conserve its cash flows and focus on investing in higher margin projects.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap