Shell Ramps Up GoM Activity

Energy major Royal Dutch Shell (RDS.A - Analyst Report) intends to enhance its upstream exposure in the Gulf of Mexico (GoM) to retain a steady output. For this, the company has designed a development plan in the GoM for West Boreas discovery, which may hold 100 million barrels of resources.

The company has also made a plan for a second platform at the deepwater Mars field in the GoM. Upon completion of the second platform, the company may add an output of 100,000 barrels of oil equivalent per day.

Production has been in a downtrend for the last few years. Last year, the company’s production declined approximately 2%. This was despite sizeable contributions from a number of projects that came on-stream during the year. During the third quarter of 2009, upstream volumes were essentially flat with the year-earlier level.

On the other hand, with a 5-year average reserve-replacement ratio of around 80%, Royal Dutch Shell has one of the weakest performances among the super majors on this critical metric.

While the current strategy to undertake major investments in unconventional and deepwater integrated projects and divest non-core assets are steps in the right direction, it remains to be seen how the company moves towards the stated goal of achieving top-quartile performance.

Given the existence of these issues, we think that Royal Dutch Shell ADRs are adequately valued and offer limited upside from current levels. We plan to remain tentative on this name until more clarity emerges on the execution front.

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