Shell Q1 Preview: Expect Solid Q1 Led By Higher Price Realization For Upstream Business

Royal Dutch Shell (NYSE:RDSA) is set to report its Q1 2018 earnings on April 26, and we expect the company to post solid numbers, primarily driven by improved price realization for its upstream operations and higher margins for its refined and chemicals products. Further, the company’s efforts to reduce its operating costs and capital spending are likely to boost its bottom-line for the year.  2017 was a good year for oil companies, as growth in WTI crude prices aided their margins, and Royal Dutch Shell in particular benefited from its massive divestments. Similarly, in 2018, the average WTI crude oil price is expected to be $56, representing a 10% jump from the 2017 average. It should be noted that the current price is much higher than the expected average by EIA. This should bode well for the company’s upstream operations in 2018, and the company’s $5 billion annual divestment target will further aid its overall performance. We have created an interactive dashboard on Royal Dutch Shell’s expected performance for 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance.

Expect Upstream Business To Drive Growth In 2018

We estimate Royal Dutch Shell’s Upstream revenues to grow roughly 11% in 2018. While we don’t expect much change in the production, the average crude oil and NGL sale price is estimated to see a 3% jump to $51. Our forecast is based on the fact that OPEC and its allies have committed to production cuts, which is likely to keep oil prices higher, as compared to the prior year. In addition, a number of geopolitical concerns are weighing on the oil prices. Venezuela is sliding into default, and the economy may contract by 15% this year. Earlier this month, the U.S., France, and the U.K. launched a missile attack on Syria’s alleged chemical weapons sites in response to allegations of the Syrian government using chemical weapons. All these factors have led to a surge in oil prices, which currently trade at $69 (WTI). Having said that, there is a risk of OPEC changing its course, given a surge in oil exports from the U.S. to Asia, which could lead to an increase in the oil production. 

Within the Upstream segment, we expect the Natural Gas business to see low single digit revenue growth, primarily led by higher price realization. It should be noted that Royal Dutch Shell’s Natural Gas price realization has declined from the peak of $6.85 in 2008 to $3.16 in 2016. However, it increased to $3.83 in 2017, due to higher demand. The overall gas demand in 2017 was high, which led to lower average inventory levels, thereby pushing the prices higher. Looking forward, natural gas prices are expected to remain steady in 2018. The benchmark Henry Hub natural gas spot price is expected to average around $2.99/MMBtu in 2018, according to the U.S. Energy Information Administration, which is similar to the 2017 average.

Overall, we expect the company to post earnings of $4.73 in 2018. We forecast a TTM price to earnings multiple of 14 by the end of 2018, which is slightly lower than most of the estimates for the sector, to arrive at our price estimate of $68 for Royal Dutch Shell. This implies a discount of around 4% to the current market price.