Zacks Investment Research



|RYL DTCH SHL CL A |(RDS-A - NYSE) |$70.03 |

|Shares per ADR – 2:1 | | |

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: Flash News Update: Shell Sells Stake in Canadian Natural for $3.3B

Prev. Ed.: May 4, 2018; 1Q18 Earnings Update (broker material was as of May 1, 2018)

Flash News Update

On May 8, 2018, Shell announced that it inked an agreement to offload its entire stake in Canadian Natural Resources Limited in order to withdraw its focus from the oil sand business in Canada. The agreement follows a similar move by the European oil giant when it jettisoned the majority of its Canadian oil sands acreage to Canadian Natural in a deal worth $8.5 billion in 2017. The asset divestiture fetched Shell a cash consideration of $5.4 billion and Canadian Natural's shares worth more than $3 billion.

Per the latest development, Shell will sell off the entire stake it had acquired from its divestment deal last year. The company will offload around 98 million shares in the Canadian Natural company for total proceeds of around $3.3 billion. Reportedly, the shares are being offered at $34.10 each, representing more than 2.8% discount to Canadian Natural’s closing share price of $35.11 as of May 7. The transaction is scheduled for closure tomorrow. The deal takes the $30 billion divestment program of Shell another step forward as the company nears its target, having already wrapped up $26 billion worth divestment deals.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON RDS.A

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Royal Dutch Shell CL A or Shell (RDS-A) is a holding company, which directly or indirectly owns investments in numerous companies constituting the group. Shell is engaged globally in all aspects of the oil and natural gas industry. It has interests in chemicals as well as in power generation and renewable energy.

Of the eight firms in the Digest group covering the stock, six provided positive ratings while two assigned neutral ratings to the stock. The firms provided the lowest target price of $80.00 (15.9% upside from the current price) and a highest target price of $84.00 (21.7% upside from the current price), with the average price being $81.37.

The following is a summarized opinion of the positive brokerage viewpoint:

Positive or equivalent (75.0%; 6/8 firms): The bullish firms believe that the $50 billion acquisition of BG Group has been a real positive for Shell. The synergistic cost savings and scale advantages from BG has helped Shell to improve profitability and cash flow.

These firms maintain that Shell’s divestiture deals are helping the company to strengthen its balance sheet, which had been affected by the BG group buyout. They believe that Shell will continue its momentum and reap benefits from its solid execution of projects, cost-containment efforts and divestment program thereby strengthening its cash flow generation even in a moderate oil price environment. They are of the view that Shell will be able to maintain its above-average dividend yield on the back of improving operations and strategic initiatives.

The bullish firms also expect Shell to generate robust production growth through the end of the decade driven largely by its primary upstream growth engine, the deep water. With various major projects underway (including Gbaran-Ubie Phase 2 Gorgon LNG project, Prelude floating LNG facility among many others), the firms believe that Shell will continue generating significant cash flows (covering both capex and dividend payout) for its shareholders over the coming years. The company’s substantial presence in Brazil offshore development is expected to contribute to volume growth as well.

The firms further believe that Shell can leverage its dominant position in global liquefied natural gas (LNG) on the back of strong demand for the fuel in coming years.

May 4, 2018

Overview [Note: only highlighted material has been changed]

Based in Hague, the Netherlands, Shell (RDS-A) is a large integrated oil and gas exploration, production, refining, and marketing company with operations and assets worldwide. The original Royal Dutch/Shell Group was formed in 1907 following the alliance between the U.K.-based Shell Transport and Trading Company and the Netherlands-based Royal Dutch Petroleum Company, with a 40% and a 60% stake, respectively. However, both companies maintained their separate and distinct identities. The unification plan proposed in 2005 by the Boards of both the companies was completed in 2006, resulting in one parent company – Royal Dutch Shell plc.

Keeping in line with the 60:40 ownership structure of the group before the unification, Royal Dutch Petroleum Company’s shareholders were given a 60% stake in the new parent company through class A shares (RDS-A), while the old Shell shareholders were given a 40% stake through class B shares (RDS-B).

Royal Dutch Shell divides its operations into four major segments: Upstream, Downstream, Corporate and Integrated Gas.

The group’s Upstream business finds and extracts crude oil and natural gas, often in joint ventures with international and national oil companies.

The Downstream unit processes crude oil into a slew of refined products, which are moved and marketed worldwide for domestic, industrial and transport use.

The Corporate segment covers the key support functions, comprising holdings and treasury, headquarters, central functions, and Shell insurance companies.

Integrated Gas is primarily involved in the transportation and liquefaction of natural gas. The unit is also engaged in converting natural gas to liquids for supplying fuels and other related products.

In 2017, Royal Dutch Shell’s oil and gas production averaged 2.777 million oil-equivalent barrels per day (MMBOE/d), of which more than 58% was liquid. As of year-end 2017, the group had approximately 12.2 billion oil-equivalent barrels in proved reserves and a combined refining capacity of approximately 3.3 million barrels per day (MMBbls/d), of which roughly 40% is located in Europe and Africa, 35% in the Americas, and 25% in Asia and Oceania.

In Feb 2016, Shell acquired UK’s third-largest energy player BG Group for a total consideration of $50 billion.

The company has around 92,000 employees and activities in more than 70 countries and territories. Additional information on the company is available at . The company operates on a calendar-year basis.

May, 20

Long-Term Growth [Note: only highlighted material has been changed]

Shell is committed to deliver a long-term competitive performance, both in terms of profitability and payout. Shell has balance sheet flexibility to maintain investment in future growth prospects. The firms believe that the company offers a lucrative investment opportunity for shareholders, based on an effective cost-saving program, synergies from BG Group buyout, diversified portfolio of development projects that offer attractive long-term benefits and improvement in cash flow generation, owing to ramp-up and start-up of various projects. Shell is also expected to benefit from its leading LNG position and the strong financial flexibility generated by various asset sales. May 4, 2018

Target Price/Valuation [Note: only highlighted material has been changed]

Provided below is the summary of valuation and ratings as compiled by Zacks Digest:

|Rating Distribution |

|Positive |75.0%( |

|Neutral |25.0%( |

|Negative |0.0%( |

|Average Target Price |$81.37( |

|Digest High |$84.00 ( |

|Digest Low |$80.00( |

|Number of Firms providing price target/Total |3/8 |

Risks to the price target include volatile oil and gas prices, drilling, and production results, successful restructuring as well as regulatory and geopolitical risks.

Recent Events [Note: only highlighted material has been changed]

On May 2, 2018, Royal Dutch Shell and China National Offshore Oil Corporation (or CNOOC) announced the commissioning of the second ethylene cracker at the Nanhai petrochemicals complex in Huizhou, Guangdong Province, China.

On Apr 26, 2018, Royal Dutch Shell reported earnings per ADS (on a current cost of supplies basis, excluding items - the market’s preferred measure) of $1.28, going past the Zacks Consensus Estimate of $1.24 and the year-ago adjusted profit of 92 cents. The outperformance was on account of rebounding commodity prices and continued improvement of its integrated gas unit.

Revenues of $91,114 million were 24.3% above the first-quarter 2017 sales of $73,311 million and beat the Zacks Consensus Estimate of $81,020 million.

On Apr 24, 2018, Royal Dutch Shell agreed to sell its downstream assets in Argentina to Brazil’s Raizen – a joint venture between Shell and Cosan – for $950 million.

On Apr 24, 2018, Royal Dutch Shell announced that it will go ahead with the Vito deep-water development in the U.S. Gulf of Mexico.

On Mar 29, 2018, Royal Dutch Shell won four additional exploration blocks during Brazil’s 15th bid round. The oil major will operate two of the newly-awarded blocks.

On Mar 28, 2018, Royal Dutch Shell completed the sale of its entire stake in Iraq-based West Qurna 1 oil field through a $406-million deal.

On Mar 20, 2018, Royal Dutch Shell released a statement updating its downstream segment’s outlook, bringing in pleasant news for the investors. The European supermajor now expects strong growth in its downstream segment over the coming years.

On Mar 15, 2018, Royal Dutch Shell announced that it will offload its remaining portfolio of energy assets in New Zealand to Austria-based OMV AG in a $578 million deal, moving ahead with its divestment goals. The move marks Shell’s exit from the country after having operated there for more than a century.

Revenue [Note: only highlighted material has been changed]

The Zacks Digest average total revenue was $89,235.0 million in 1Q18, up 24.3% from $71,796.0 million in 1Q17 and up 4.5% from $85,422.0 million in 4Q17.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

|Revenue ($ M) |1Q17A |4Q17A |1Q18A |2016A |2017A |

|Digest Low |$71,796.0 |$85,422.0( |$89,235.0 |$233,591.0( |$305,179.0( |

|Digest Average |$71,796.0 |$85,422.0( |$89,235.0 |$233,591.0( |$305,179.0( |

|Y-o-Y Growth |47.9% |31.9% |24.3% |-11.8% |30.6% |

|Q-o-Q Growth |10.9% |12.6% |4.5% | | |

Note: Blank cells indicate that none of the brokers provided any estimates

Segment Details

Upstream

Per the Zacks Digest Model, volumes in 1Q18 averaged 3,838.8 thousand oil-equivalent barrels per day (MBOE/d), up from the year-ago quarter level of 3,751.5 MBOE/d. Ramp-up of new fields boosted its oil and gas production.

Natural gas volumes increased 8.9% and liquids output was down 4.3% from the corresponding quarter last year. Crude oil contributed approximately 47% of Shell’s total volumes, while natural gas accounted for the rest.

|Production |1Q17A |4Q17A |1Q18A |

|Crude Oil (thousand barrels per day) |1,866.0 |1,772.6 |1,785.0 |

|Natural Gas (million mcf/d) |10,935.0 |11,544.4 |11,912.0 |

|Total (thousand oil-equivalent barrels per day) |3,751.5 |3,761.5 |3,838.8 |

LNG equity sales volumes of 18.58 million tons were up 17.3% from the year-ago quarter due to higher sales volumes from the Gorgon development in Australia.

Price Realizations – During 1Q18, Shell’s worldwide realized liquids prices were 23.4% above the year-earlier levels while natural gas prices were up 13.3%.

Downstream

During the reported quarter, Oil Products sales volumes were 6,785 thousand barrels per day (b/d) compared with 6,508 thousand b/d in 1Q17 and 6,861 thousand b/d in 4Q17.

Refinery intake volumes increased 0.3% year over year to 2,637.0 thousand b/d in 1Q18. Refinery availability was 92%, down from 94% in 1Q17.

Chemicals sales volumes fell 0.7% year over year to 4,514 thousand tons in 1Q18, while chemicals manufacturing plant availability was up 1% at 94%.

Project Updates

In the U.S. Gulf of Mexico, Shell Royal Dutch Shell agreed to sell its downstream assets in Argentina to Brazil’s Raizen – a joint venture between Shell and Cosan – for $950 million.

Outlook

Production ramp up from high cash margin major capital projects in the Santos Basin in Brazil, the Gorgon LNG project in Australia, Stones in the deep-water Gulf of Mexico, Kashagan in Kazakhstan and Quad 204 (Schiehallion redevelopment) in the UK are expected to boost Shell’s volumes and enhance revenues.

Margins [Note: only highlighted material has been changed]

Provided below is a summary of margins as compiled by Zacks Research Digest:

|Margins |1Q17A |4Q17A |1Q18A |2016A |2017A |

|Net Margin |4.8% |4.3% |6.5% |1.9% |4.2% |

Per the Zacks Digest Model, Depreciation, depletion and amortization (DD&A) was $5,334.0 million in 1Q18 compared with $7,838.0 million in 1Q17 and $5,796.0 million in 4Q17.

In 1Q18, interest expense decreased 15.8% y-o-y and 4.9% sequentially to $936.0 million.

Segment Earnings

Upstream

In 1Q18, Upstream segment earnings were $1,551.0 million, soaring from the $540 million earned in 1Q17. This primarily reflects the impact of the impact of higher oil and gas realizations.

Downstream

The company recorded a profit of $1,686.9 million in the Downstream segment, down from $2,489.0 million in the year-ago period. The negative comparison reflects the impact of a weaker refining environment, foreign currency translation effects and lower trading contributions.

Integrated Gas

The company reported income of $2,439.0 million in the Integrated Gas segment, a 106.5% improvement from the $1,181.0 million in 1Q17. Results were favorably impacted by an increase in commodity prices, higher LNG production, as well as increased contributions from trading.

Corporate

Corporate results and non-controlling interests reported a loss of $234.0 million in 1Q18 compared with a loss of $347.0 million in 1Q17 and a loss of $285.0 million in 4Q17.

Outlook

The bullish firms believe that Shell’s aggressive cost cut efforts will improve margins.

Earnings per Share [Note: only highlighted material has been changed]

The Zacks Digest average CCS earnings in 1Q18 were $1.27 per share, up 38.9% from 91 cents per share in 1Q17, and 23.0% from $1.03 per share in 4Q17. The outperformance was based on rebounding commodity prices and continued improvement of its integrated gas unit.

The Zacks Digest average net income – adjusted CCS in 1Q18 was $5,321.9 million, up 41.8% from $3,754.0 million in 1Q17 and 23.7% from $4,303.0 million in 4Q17.

The Zacks Digest average American Depositary Receipt (ADRs) in 1Q17 was 4,281.2 million, up 3.8% y-o-y and 1.9% sequentially.

Outlook

The bullish firms believe that earnings will improve in the coming quarters owing to higher commodity prices, asset sale proceeds, increased volumes and successful cost control efforts.

May 4, 2018

|Research Analyst |Rimmi Singhi |

|Copy Editor | |

|Content Ed. | |

|Lead Analyst |Nilanjan Choudhury |

|QCA |Nilanjan Choudhury |

|No. of brokers reported/Total brokers | |

|Reason for Update |Flash News Update |

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May 8, 2018

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