We have retained our Neutral recommendation on energy major Royal Dutch Shell plc (RDS.A) with a price target of $67.
Royal Dutch Shell is one of the largest integrated energy firms in the world with a strong and diversified portfolio of development projects that offer attractive long-term opportunities. We expect the group to continue accelerating revenue and earnings growth over the next few quarters, driven by operational/production efficiency and contributions from strategic programs – which include aggressive cost reduction initiatives, exit from unprofitable markets and streamlining the organization.
At its annual strategy update, the Anglo-Dutch supermajor outlined plans to boost its focus on the more lucrative and well performing ‘upstream’ exploration and production end of the business. The group expects annual worldwide production to increase 12% by 2014 (from 2010 levels), driven by a new wave of project start-ups.
Shell’s targeted output rise to 3.7 MMBOE/d, represents one of the most ambitious growth programs in the sector, to be achieved primarily by new projects coming onstream in Qatar, Australia and North America. The Hague-based group is currently assessing more than 30 new projects that should guarantee upstream growth to at least 2020.
However, due to its integrated nature, Royal Dutch Shell is particularly susceptible to the downside risk from the current turmoil in the global economy. We are also concerned by the company’s high level of capital spending – at least $25 billion annually for 2011 to 2014 – which may result in reduced returns going forward.
As of now, we don't see any obvious catalyst in its business that would significantly push the stock price higher. We expect Royal Dutch Shell’s returns to remain below average, as the group makes significant investments in large growth projects.
Additionally, the firm’s relatively heavy downstream exposure is likely to limit its ability to generate positive earnings surprises. Consequently, we see the stock performing in line with the broader market. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
Royal Dutch Shell – Europe's biggest oil company by market value ahead of BP plc (BP) and Total SA (TOT) – owns one of the largest integrated energy businesses in the world. The group has operations all over the world and is involved in various activities related to oil and natural gas, chemicals, power generation, renewable energy resources and other energy-related businesses.
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