Should you buy Royal Dutch Shell plc and BP plc ahead of Super Tuesday?

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A Shell fuel nozzle

The UK's two leading oil companies, Royal Dutch Shell(LSE: RDSB) and BP(LSE: BP) are both slated to report their third quarter results tomorrow, and the market is waiting with baited breath. BP and Shell are two of the world's largest oil majors, so their results can reveal a lot about the wider oil industry.

In the current environment, the performance of these two bellwethers is under even more scrutiny as analysts try and figure out how Big Oil is coping with the limp price of black gold.

Over in the US, BP and Shell's larger peers Chevron and ExxonMobil have already reported their third quarter results, but the figures were mixed. Exxon reported a fall in profits and output while Chevron's management is expecting the group's hydrocarbon production to rise this year. Chevron's drastic cost-cutting has also helped the company dramatically reduce losses at its upstream arm. 

An improved operating performance has given Chevron's management the confidence to increase the company's dividend payout by $0.01 per share this year, extending the company's record of consecutive annual dividend increases to 29 years. 

It's hard to try and predict what sort of performance for the third quarter BP and Shell will report tomorrow, but just like their US peers, I believe the fortunes of these two companies could vary significantly. 

Past trends are revealing 

For the first half of 2016, BP surpassed City expectations reporting earnings per share of $0.03 for the first quarter and $0.04 for Q2. The average City estimate was calling for earnings per share of $0.00 and $0.04 for the first and second quarter respectively. 

Shell's first quarter earnings were in line with the City consensus but for the second quarter the company missed the target dramatically, reporting earnings per share of $0.13 compared to the City's target of $0.30.

These performances might be a sign of things to come. Analysts are expecting earnings per share of $0.25 from BP and $0.28 from Shell for the third quarter -- a fall of 57% and 49%, respectively, from the same period last year. And after the last quarter's performance, the pressure is really on Shell to hit this target. 

Dividend cut? 

Shell's Q2 worse than expected 72% year-on-year drop in profitability reignited speculation about the sustainability of the company's 7.2% dividend yield. Another negative surprise will fan the flames of this debate further. The company is battling to reduce debts after buying BG Group for £35bn last year, and analysts will be looking for progress on this front too. A lack of debt reduction progress and an earnings miss would be an awful combination for the company. 

BP has more room for manoeuvre. After the company's better-than-expected first-half performance, the City will be willing to give the company some additional space. Unlike Shell, BP's debt has been falling during the past few years and the company's 6.7% dividend yield looks safe for the time being -- analysts are certainly much more at ease about the sustainability of BP's dividend than they are of Shell's. 

So overall, it may not be wise to buy Shell ahead of its results tomorrow, but BP is a different story. After a solid first half, I'm inclined to believe that the company is on track to meet City targets for the third quarter. 

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Rupert Hargreaves owns shares of Chevron and Royal Dutch Shell B. The Motley Fool UK owns shares of ExxonMobil. The Motley Fool UK has recommended BP, Chevron, and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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