Royal Dutch Shell (RDS.A): What Will Q4 Earnings Unveil?

Europe's largest oil company Royal Dutch Shell plcRDS.A is set to release its fourth-quarter 2016 results before the opening bell on Thursday, Feb 2.

What Investors Need to Know

The company's stock performance has been pretty choppy lately, and it will be up to this coming release to set the trend for 2017.

Earnings estimates have been bullish for the stock, as the consensus estimate has been going up over the past few months. This is something that investors want to see heading into a report.

To make matters better, it has an 'A' for its VGM Score .

On the flip side, The Hague-based supermajor has a poor industry rank. It is one of the major players in the Oil & Gas - International Integrated industry, which is ranked 198 out of the 265 industries in our coverage (bottom 25%). Shell also has a Zacks Rank #3 (Hold), so fundamentals are pretty tepid for this stock.

The company also has a dismal great track record when it comes to earnings, as it has missed estimates in 3 of the last four quarters, as you can see in the chart below:

Royal Dutch Shell PLC Price and EPS Surprise

Royal Dutch Shell PLC Price and EPS Surprise | Royal Dutch Shell PLC Quote

Therefore, true to Shell's 'Hold' rating, the signals are mixed and it seems as if it could be a rockier report than one might think.

Let's see how things are shaping up for this announcement.

Factors to Consider This Quarter

The OPEC deal and extreme weather conditions engineered a hefty rise in oil and gas prices during the fourth quarter.

A historic OPEC production cut agreement, together with help from non-OPEC producers saw oil prices end the year at $53.72 a barrel -- representing a gain of 11.4% sequentially and 45% for the year.

Meanwhile, natural gas embarked on its own upward journey, with futures jumping around 25% just in the fourth quarter. Ending the year at $3.724 per million Btu (MMBtu) - up 59% from 2015 - the heating fuel was buoyed by a cold snap that translated into strong demand.

All this bodes well for Shell and its upstream unit in particular.

Production gains too present a bright spot for the group. In the previous quarter, Shell's upstream volumes averaged 2,683 thousand oil-equivalent barrels per day (MBOE/d), 21% higher than the year-ago period. While crude oil production increased 25%, natural gas output was up 15% -- thanks to the contribution from BG Group that was acquired in early 2016.

Shell's successful cost reduction initiatives are expected to further cushion the results. To its credit, the company has been able to achieve a substantive decline in the operating cost structure despite the increase associated with the consolidation of BG.

But worryingly, there are signs of weakness in the refining business, suggesting that the unit - which saved Shell when crude prices plunged - could now be a drag. The third quarter saw the integrated behemoth's downstream segment income erode on fuel oversupply and weak demand. With refined product margins set to be lower on narrower crack spreads, Shell could be in for more trouble in the to-be-reported quarter.

Earnings Whispers

Our proven model does not conclusively show that Royal Dutch Shell will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at 69 cents.

Zacks Rank: Royal Dutch Shell has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, the company's ESP of 0.00% makes surprise prediction difficult.

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

Stocks to Consider

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

Noble Midstream Partners L.P. NBLX has an Earnings ESP of +19.18% and a Zacks Rank #1. The partnership is expected to release earnings results on Feb 1. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Imperial Oil Ltd. IMO has an Earnings ESP of +3.45% and a Zacks Rank #1. The company is anticipated to release earnings on Jan 31.

Anadarko Petroleum Corp. APC has an Earnings ESP of +7.84% and a Zacks Rank #2. The company is likely to release earnings on Jan 31.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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