Royal Dutch Shell Gets More Efficient in Exploration and Production

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Includes: RDS.A, RDS.B
by: Kurt Wulff

Buy-recommended Royal Dutch Shell plc (NYSE:RDS.A) offers unlevered appreciation potential of 37% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $79 a share. On July 14 we reduced NPV from $80 when we reduced estimated Present Value of North American Natural Gas by 20%.

Second quarter results released today exceeded our estimates for unlevered cash flow (Ebitda) from three months ago on the strength of higher oil price. Higher cash flow margin upstream, an indicator of efficiency, offset lower natural gas price outside North America and greater decline in downstream. Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil. Downstream operations are depressed currently along with global economic activity.

On the production side, RDS sees more seasonality in its volume stemming from European natural gas sales. The trend in production cash flow per barrel tells the same story as oil price and global equity prices, which declined last year and appear to be recovering now. Pointing to possible further gains, futures prices for the next six years for oil crossed the 40-week average into an uptrend at the end of May.

Originally published on July 30, 2009.