We are maintaining our Neutral recommendation on Royal Dutch Shell Plc. (RDS.A) with a target price of $64.

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.

The Anglo-Dutch supermajor expects its annual production to increase 11% by 2012, driven by a new wave of project startups. As of now, Shell has decided to boost focus on the more lucrative and well performing ‘upstream’ exploration and production end of the business, mainly natural gas.

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.

However, Royal Dutch Shell’s downstream operations have struggled in recent times due to weak demand for fuel, leading to mounting losses in this segment. The company plans to boost returns and remain competitive in this difficult environment by embarking on aggressive cost reduction initiatives, exiting unprofitable markets, and streamlining the organization.

But these restructuring initiatives are expected to bear results only by the first half of 2010. Until then, we do not anticipate a significant upside and expect Royal Dutch Shell ADRs to perform in line with the broader market.

The Hague-based Royal Dutch Shell owns one of the largest integrated oil and gas 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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