Royal Dutch Shell Gears Up for Q3: Will it Beat on Earnings? - Analyst Blog

Europe’s largest oil company Royal Dutch Shell plc (RDS.A) is set to release its third-quarter 2014 results before the opening bell on Thursday, Oct 30.

In the preceding three-month period, Shell delivered a positive 12.79% earnings surprise – the second outperformance in the last 4 quarters – buoyed by strong realizations on its lucrative crude oil exploration and production business. Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

The integrated major’s successful divestment program over the past year has made the company focus more on critical, higher-return projects. This has resulted in capital discipline and improved returns that may augment third quarter earnings.

However, with liquids contributing almost half of Shell’s total production, the crude price tumble over the last three months is expected to drag down results for the group.

As it is, due to its integrated nature, Shell is particularly susceptible to downside risk from the current weakness in the Chinese and the European economy.

Earnings Whispers?

Our proven model does not conclusively show that Shell is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Positive Zacks ESP: This is because the Most Accurate estimate stands at $1.76, while the Zacks Consensus is lower at $1.74. This results in an ESP of +1.15%.

Zacks Rank #5 (Strong Sell): Shell’s Zacks Rank #5 when combined with a positive ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

While earnings beat looks uncertain for Shell, here are some energy firms you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

Murphy USA Inc. (MUSA) has an Earnings ESP of +20.51% and holds a Zacks Rank #1 (Strong Buy).

Cobalt International Energy Inc. (CIE) has an Earnings ESP of +11.11% and holds a Zacks Rank #1.

Delek Logistics Partners L.P. (DKL) has an Earnings ESP of +5.56% and holds a Zacks Rank #1.

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