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Why We Believe Shell’s Stock Is Worth $62

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Screen Shot 2015-09-17 at 07.55.40Trefis Team, CONTRIBUTOR: Oct 16, 2015

Royal Dutch Shell Plc. is one of the world’s leading oil & gas companies with operations all across the globe. The company has been hit hard by the current downtrend of low crude oil prices and its average price realizations in both upstream and downstream segments have suffered as a result. Consequently, we believe that Royal Dutch Shell’s Trefis adjusted total revenue for the year 2015 will decline by close to 30% as compared to last year and amount to $337.3 billion (Calculated revenue figures not subjected to any intersegment elimination). However, we believe that a gradual recovery in oil prices in subsequent years will lead to a period of growth in Royal Dutch Shell’s revenues and the company’s revenues will be just shy of $450 billion by the end of our forecast period (2022). Our price target for Royal Dutch Shell stands at $62, implying a premium of more than 10% to the market. In this piece, we try to analyze some of the key drivers we have used in our valuation of Royal Dutch Shell.

See Our Complete Analysis for Royal Dutch Shell Plc.

Average Price Realizations For Both Upstream & Downstream Segments Hurting Royal Dutch Shell

Royal Dutch Shell’s upstream operations constitute around 77% of the stock’s value, according to our estimates. We calculate that the company earned around $98.5 billion in adjusted upstream revenues in 2014. However, the extended period of low crude oil prices has hurt the company’s upstream operations in 2015. Even though Royal Dutch Shell’s liquids production has remained stable in 1H-2015 compared to 1H-2014, the company’s global liquids realizations were 48% lower during the same period. The average crude oil price has remained below $60 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year due to the ongoing production related stand-off between OPEC and Non-OPEC producers. Consequently, we believe that Royal Dutch Shell’s Average Crude Oil and NGLs Sales Price (per barrel) will amount to less than $50 for the year 2015 and will subsequently witness a gradual recovery throughout our forecast period.

Natural Gas realizations have not fared any better for Royal Dutch Shell. The company’s Average Natural Gas Sales Price (per thousand cubic feet) was 28% lower during the first six months of 2015 as compared to the prior year period. Making a bad situation worse is the fact that Royal Dutch Shell’s Natural Gas Production (cubic feet per day) has also gone down 13% for the year so far. A similar story has played out in Royal Dutch Shell’s downstream operations and Trefis estimates that the company’s Average Refined Products and Chemicals Revenue per Metric Ton has dropped more than 30% in 1H-2015 as compared to the year ago period. We believe that this figure will remain just below $1050 for 2015 before staging a recovery in later years. As a result of this rapid decline in realizations in both upstream and downstream sectors, we believe that Royal Dutch Shell’s total revenue for the year 2015 will decline 29% and amount to $337.3 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

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