Rising Commodity Prices And Higher Volumes To Lift Shell’s 3Q’18 Results

Royal Dutch Shell (NYSE:RDS.A), the European integrated energy company, is slated to release its September quarter financial performance on 1st November 2018. The market expects the company to report a solid improvement in its quarterly as well as annual revenue driven by improved price realization for its upstream operations. Further, the company has efficiently managed its operations and lowered its break-even price, which is likely to bolster its profitability and returns. Shell’s investment in new high-margin projects to leverage the recovery in the markets is likely to drive its value in the long term.

We have a price estimate of $67 per share for Royal Dutch Shell, which is in line with its current market price. View our interactive dashboard – Royal Dutch Shell’s Price Estimate and modify the key drivers to visualize their impact on its valuation.

Key Trends To Watch For In 3Q’18 Results

• Crude oil prices have seen a rebound in the first half of 2018 due to the extension of the Organization of Petroleum Exporting Countries’ (OPEC) production cuts until the end of 2018. Brent crude oil price rose sharply in the third quarter and averaged at $75.07 per barrel, 44% higher compared to the same quarter of last year. Accordingly, we expect Shell to see higher price realization for the quarter, which will, in turn, drive its upstream revenue.
• Shell has successfully delivered several major projects, adding about 500,000 boed of average production to its existing capacity. Some of the projects that have recently come online include Prelude FLNG (floating liquefied natural gas) project, oil and gas projects in Bonga North West and Cardamom, and deepwater projects in Malaysia, Brazil, Norway, and Philippines.

• Based on the company’s estimates, the ramp of these projects, coupled with the start-up of newer projects, will cause the company’s incremental cash flows to rise to $10 billion in 2018, and its ROACE to increase to 10% by 2020, at $60 per barrel oil prices.
• Shell plans to invest around $4-$5 billion each year over the next three years to build a robust pipeline of LNG projects, which will only allow it to efficiently manage its cash flows in a weak price environment. This will also equip the company to take advantage of the dis-equilibrium in the LNG markets in the future years. If the dynamics of the LNG markets pan out as expected, Shell’s integrated gas division will be a key driver of its value in the long term.

• At the beginning of 2018, Shell had announced the cancellation of its scrip dividend program and reinstated cash dividends to its shareholders. The company announced an interim dividend of $0.47 per share in the first quarter of 2018. We expect a similar dividend announcement in this quarter as well.
• Shell had planned to restrict its annual capital investment to $25-$30 billion over the next three to four years. However, due to the faster-than-expected recovery in commodity prices, the company is likely to increase its investments at $30 billion and use the excess cash flows to accelerate its debt reduction.

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