How Higher Crude Oil Price Realization Can Impact Royal Dutch Shell

by Trefis Team
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Downside
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Trefis
RDSA
Royal Dutch Shell Plc.
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The earnings for most of the oil companies are highly correlated with crude oil prices, which impact their upstream operations. Currently, oil is on a strong rally with the WTI crude oil price recently touching the $70 mark, reflecting the highest level since November, 2014. Higher oil prices will likely push the earnings growth for oil companies, such as Royal Dutch Shell (NYSE:RDSA). We have created an interactive dashboard that shows how changes in average oil price realization can impact the company’s performance. 

Higher Price Realization Will Boost Shell’s Earnings

We estimate Royal Dutch Shell’s average crude oil and NGL sales price to grow 15% to $56 levels, while we don’t expect any significant change in the production. Our forecast is based on the current trends in oil prices, which are on a strong run so far this year. The average WTI crude oil price recently hit the $70 mark, while the average price for 2017 was around $50. EIA forecasts the average price for 2018 to be a little under $60. In fact, Shell’s realized price in Q1 was over the $60 mark. There were several factors that led to this move. To begin with, OPEC and its allies committed to production cuts in 2018, by extending their agreement in late 2017. This resulted in lower inventory levels, which pushed the oil prices higher. Last month, there were concerns over an alleged chemical attack in Syria, and it was responded to with missile launches by the U.S., U.K. and France. Furthermore, the Venezuelan economy is in turmoil, and it is expected to contract by 15% this year, according to the IMF. This has impacted Venezuela’s oil industry as well, and is aiding the oil price growth. Lastly, there are concerns over the Iran nuclear deal, which will possibly not be renewed by the U.S.  Given that Iran is a large oil producer, any conflict may result in supply cuts. 

Given these factors, oil prices are expected to remain high in 2018. There could be a potential upside of over 5% to our price estimate if Shell’s average price realization is around $70 this year, as shown in the scenario on the interactive dashboard analysis. (Check the “Compare” box in the upper left for “Average Price realized ~ $70.) We currently forecast the earnings of $5.32 per share for 2018, and we have a price estimate of $67, which is slightly below the current market price.

 

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