Europe’s largest oil company Royal Dutch Shell Plc (NYSE: RDS.A) reported fiscal 2017 second-quarter earnings that tripled from the similar quarter last year. Royal Dutch Shell also reported a 245% y-o-y increase in 2Q17 net profit on the current cost of supply basis (CCS). On the basis of facts presented underneath, we anticipate the stock of Royal Dutch Shell to rally in the week ahead.
The diversified energy company reported an increase in revenues from $60.271 billion in second-quarter 2016 to $72.70 billion in the second quarter of 2017. Likewise, the 2Q17 earnings on a CCS basis increased from $239 million, or $0.03 per share ($0.06 per ADS), to $1.920 billion, or $0.23 per share ($0.46 per ADS), in the year-ago period.
Excluding items, the quarterly adjusted earnings on a CCS basis was $1.045 billion, or $0.13 per share ($0.26 per ADS), compared with $3.604 billion, or $0.43 per share ($0.86 per ADS), in the second quarter of 2016. Analysts had anticipated earnings of $0.75 per ADS on revenues of $67.78 billion for the second quarter.
The upstream segment swung to a profit of $339 million during the second quarter, from a net loss of $1.325 billion in the same period last year. The volumes increased 2% y-o-y to 2,672 MBOE (Million Barrels of Oil Equivalent) per day. Royal Dutch Shell also realized 16% and 31% higher liquid and natural gas prices, respectively.
The downstream segment recorded an adjusted income of $2.529 billion, up 39% from $1.816 billion in the year-ago period. The integrated gas division posted an adjusted income of $1.169 billion, compared with $868 million in the June quarter of 2016.
The cash earned from the impressive performance of the downstream segment enabled the company to reduce debt to $66 billion, from $76 billion a year earlier. Royal Dutch Shell company’s debt increased considerably after the acquisition of the BG Group, a gas producer. To a certain extent, divestments also enabled the company to reduce debt.
The company’s oil output was 3.5 MBOE per day, down 7.4% from the previous quarter. Royal Dutch Shell operates in OPEC countries. Thus, the production cap imposed by the OPEC cartel continues to affect its output. Additionally, the company is divesting some of its Canadian oil sands projects. That affects the total oil output as well. The company’s Pearl gas-to-liquids plant in Qatar has gone into full operation only at the end of the June quarter. Thus, it had a negligible impact on the overall production figures.
Considering the impressive earnings, ten out of eleven analysts have issued a “buy” or “strong buy” rating for the stock with a price target of $70. Thus, fundamentally, the stock is expected to appreciate soon.
As illustrated by the historic price chart, the stock moves along an ascending trend line. The stochastic oscillator is in the oversold region and the Chaikin money flow index is moving above the reading of zero. The indicators also confirm a bullishness in the stock. Thus, we can expect an upswing in the stock of Royal Dutch Shell.
To benefit from the probable appreciation in the share price, we wish to invest in a call option when the stock trades near $55 in the equity market. An option expiration date around September 2nd would increase the odds of success in the trade.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
