We are maintaining our Neutral recommendation on Royal Dutch Shell Plc. ( “>RDS.A ) with a target price of $67.
In terms of assets, Royal Dutch Shell owns a strong and diversified portfolio of global energy businesses that offers attractive long-term growth opportunities. The group’s strong inventory of development projects and increased capital expenditures should help volume growth in the long run. Hague-based Shell 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.
The Anglo-Dutch behemoth expects its annual worldwide production to reach 3.7 MMBOE/d in 2014, up from 3.15 MMBOE/d in 2009. Shell’s targeted output increase – driven by a new wave of project start-ups – would reverse the declining trend of the last several years. The company is currently assessing more than 35 new projects that should guarantee upstream growth to at least 2020.
In line with other supermajors like ExxonMobil Corp. ( “>XOM ) and Chevron Corp. (CVX), Shell sees natural gas playing an important part in its future. The company’s targeted volume growth will be achieved primarily by new natural gas projects coming onstream in Qatar, Australia and North America. Shell said that it expects natural gas to represent 52% of total volumes by 2012.
Recently, the group reported strong third-quarter 2010 results, buoyed by a robust operating environment, production growth and cost cutting initiatives. Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.61, significantly ahead of the year-ago result of 86 cents and also exceeded the Zacks Consensus Estimate of $1.34. Revenues were up 20.9% to $90.7 billion.
(Read our full coverage on this earnings report: Shell Continues to Outperform)
However, Royal Dutch Shell’s heavy downstream exposure leaves it relatively less diversified compared to its integrated peers. As such, the group’s results remain heavily exposed to refining/marketing margins. Shell’s downstream operations have struggled recently due to weak demand for fuel, leading to lower returns in this segment.
This will continue to weigh on the company’s revenue and profitability, at least in the near- to medium-term. As such, we expect Royal Dutch Shell’s growth potential to be restrained and see the ADRs performing in line with the market.
CHEVRON CORP (CVX): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
Zacks Investment Research
