Royal Dutch Shell Has Underperformed S&P, But Could Rebound

• Royal Dutch Shell plc (ADR) RDS shares have declined 18 percent year-to-date, but are up 19 percent since September 16.
• Argus’ Michael Burke upgraded the rating on the company from Hold to Buy, while maintaining a price target of $73.
• Shell’s efforts to cut costs and improve returns are likely to pay-off in terms of improved profitability and boost share valuation, Burke noted.

Analyst Michael Burke expects Royal Dutch Shell’s efforts to trim costs, maintain adequate liquidity and improve returns on capital to have a positive impact on profitability and boost stock valuation.

“We expect Shell's underperformance relative to the S&P and the Energy sector over the last five years to reverse,” he added.

The company aims to cut its capital spending by 20 percent to $30 billion in 2015. Burke said that this would be achieved through asset divestitures, supply-chain savings and project deferrals. Royal Dutch Shell is also aiming to cut its operating costs by $4 billion, or 10 percent, this year and bring them to the 2011 levels.

The analyst believes that Shell is poised to benefit from a recovery in oil prices. The company’s net-debt-to-capital ratio is expected to be a manageable 2 percent after the completion of its merger with the BG Group.

Asset sales, additional debt issuance and spending cuts are expected to allow Shell to support its annual dividend payment of $10 billion a year, the Argus report stated.

The EPS estimates for 2015 and 2016 have been raised from $4.15 to $4.60 and from $4.16 to $4.98, respectively.