Isn’t it great when City analysts think alike?
Take those who follow Shell. On Tuesday of several of them decided to cut their earnings forecasts — all at the same time.
Spooky or what?
We have cut our 4Q09 earnings estimate by 19% to U$2.9bn to reflect the impact of extremely weak refining margins and weaker earnings than in 3Q09 from oil marketing operations on the groups Oil Products result. Our revised forecast for the downstream is for a net loss of U$0.2bn. We have also cut our 2010 earnings forecast by 4% to reflect lower expectations for downstream earnings. Although refining margins are somewhat higher so far this year, 1Q10 already looks like being another difficult quarter in this business area.
We our downgrading our FY 09 clean EPS number by 12% to $1.91 (from $2.18). While the upstream part of RDS should have benefited from higher crude prices, the downstream business, as suggested by Chevron’s trading update on Monday, we believe has continued to deteriorate. This continued collapse also suggests the underlying demand required to maintain crude prices at the $80/bbl has not yet arrived.
Reflecting the downstream weakness, we cut our 09-10E EPS by 3%. We believe that investors fixating on the near term weak operational performance may miss the compelling story that Shell presents medium term. The underperformance of the stock against peers in the past 12 months has opened a valuation gap (5.3x 2010E EV/DACF, c5% discount to peers) and we see potential for Shell to close it as the market becomes more comfortable with the ability of the company to improve its cashflow generation. We maintain our Buy rating.
On a slightly different tack, Morgan Stanley downgraded its rating on the company to “underweight”.
Shell underperformed last year and we expect it to do so again for the next 6 months. While we acknowledge the upside potential from new growth projects in the coming years, given the poor track record of the super-majors over the past decade, investors will ultimately judge Shell on delivery rather than promise. While we raise our price target to 2000p /sh, the implied upside of 9% to current share prices is towards the bottom of the pack, hence our move to an UW rating
Now this could just be coincidence. As we noted earlier today, no one should be surprised that Shell’s downstream and gas operations suffered in the fourth quarter.
After all, it was the reason for Chevron’s disappointing fourth quarter earnings report earlier this week.
Here’s what Chevron said.
Both U.S. and international downstream results in the full fourth quarter are expected to be substantially lower, in large part due to depressed margins.
Indeed, that must be the explanation for today’s Vulcan mind-meld among Shell followers because as everyone knows selective briefing has been outlawed by the FSA.
Shares in Shell closed lower.