We are maintaining our Neutral recommendation on Royal Dutch Shell Plc. (RDS.A) with a target price of $55.
 
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.
 
Recently, the group reported strong first-quarter 2010 results, buoyed by higher energy prices and production growth. Earnings per ADR (on a current cost of supplies basis), excluding one-time items and gains or losses from inventories, came in at $1.57, which were quite some distance ahead of the year-ago result of 98 cents and also exceeded the Zacks Consensus Estimate of $1.32. Revenues were up 47.8% to $86.1 billion.
 
However, 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. As part of that plan, the integrated major sold its retail and refining interests in New Zealand and is looking at further disposals. Shell is also making good progress in its initiative to save at least $1 billion in 2010.
 
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.
 
Royal Dutch Shell is currently rated as Zacks Rank #3 (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our Neutral recommendation, which implies that Shell shares are expected to perform in line with the overall U.S. equity market over the next six to twelve months. Therefore, we advise investors to retain the stock over this time period.
 
Hague-based 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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