Shell’s 1Q’17 Earnings To Surge Backed By Higher Price Realizations And Better-Than-Expected Refining Margins
Following the footsteps of its competitors, Exxon Mobil and Chevron, Royal Dutch Shell (NYSE:RDS.A) is set to post a strong improvement in its March quarter 2017 earnings on 4th May 2017((Royal Dutch Shell Announces March Quarter 2017 Results, 5th April 2017, www.shell.com)), backed by the sharp recovery in commodity prices during the quarter. Also, contrary to market expectations, the global refining margins improved in the last three months, which is likely to enhance Shell’s downstream operations, and in turn provide a boost to the company’s revenue and profits for the quarter. In addition, the European company sold a number of its non-strategic and low margin assets during the quarter, in order to streamline its portfolio, while negotiating an attractive price for these assets, which will enable the company to improve its liquidity in the coming quarters. Further, Shell outlined the outlook for the LNG sector, and remains optimistic about the potential of the industry.
See Our Complete Analysis On Royal Dutch Shell Here
Key Trends Witnessed in 1Q’17
The first quarter of 2017 saw a surge in commodity prices, as the Organization of Petroleum Exporting Countries (OPEC) implemented the agreed production restraints, causing crude oil prices to trade in the $50-$55 per barrel range for most part of the first quarter. However, the crude oil prices dipped to under the $50-per-barrel mark in March due to rising US shale production and stockpile, bringing down the WTI oil price average to around $52 per barrel for the quarter. Yet, the oil prices were notably higher than the $33 per barrel average in the same quarter of last year. Further, the Henry Hub gas prices increased from $1.99 per MMBTU in 1Q’16 to over $3.02 per MMBTU in the latest quarter. Thus, overall we expect to see a notable rise in Shell’s upstream revenue as well as profits for the quarter.
Data Source: US Energy Information Administration (EIA)
Further, as mentioned earlier, we figure that the global refining margins improved during the first quarter, despite the rising commodity prices. This trend is visible from the 1Q’17 earnings release of Exxon and Chevron, two of the integrated companies that reported remarkable improvement in their downstream earnings last week. Consequently, we expect Shell’s downstream operations to post a solid rise, lifting the overall earnings of the company.
In terms of costs, Shell has managed to keep a close check on its operating costs, bringing down its costs from $46 billion (including BG Group) in 2015 to $39 billion in 2016. Due to the successful integration of the BG Group operations, we expect the company to realize higher-than-anticipated synergies, which will augment the company’s margins for the quarter. Going forward, Shell aims to restrict its operating costs under $40 billion over the next couple of years.
That said, the oil and gas giant aims to hold back its capital spending between $25 billion and $30 billion each year, despite the improving outlook of the oil and gas industry. This will not only allow the company to focus on enhancing the economic viability of its existing assets and investing in high-margin projects to boost its future value, but will also enable the company to manage its liquidity in the forthcoming years.
Apart from this, the integrated energy company divested several non-core and low margin assets from its portfolio during the quarter. These include the sale of Gabon onshore interest, oil sand interest in Canada, UK North Sea assets, Bongkot field in Thailand, and LPG business in Hong Kong and Macau. The proceeds of these deals is expected to be over $13.5 billion, which is likely to be utilized to finance the company’s capital expenditure, reduce its long term debt, and increase its dividend payment. With the closure of these deals, we believe that Shell is progressing well towards achieving its divestment target of $30 billion for 2016-2018, and is likely to exceed this target faster-than-anticipated.
Overall, we believe that Shell has laid down an extensive strategy for the next few years that will enable the company to reshape its operations and emerge out of the ongoing commodity slump.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap