Markets

Royal Dutch Shell Better Positioned as Oil-Producing Countries Begin to Reduce Output

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Royal Dutch Shell (RDS.A, RDS.B) is in a better position as members of the Organization of the Petroleum Exporting Countries and other producers begin curbing production in a bid to boost prices, RBC researchers said in a note to clients on Wednesday.

London-based analysts Biraj Borkhataria and Thomas Klein raised their rating on the company to outperform from sector perform, and expect the company to produce 3.89 million barrels a day in 2017, up from 3.71 million barrels a day last year.

"We believe the recent OPEC/non-OPEC supply deals have put the oil market on much firmer footing, which removes some of our tail-risk concerns for Shell," the analysts said. "Looking ahead, we see the potential for strongly improving cash flow generation, while in the near term, we believe net debt should begin falling from its peak."

Oil futures have more than doubled since February when prices dropped to near $26 a barrel amid declining production. West Texas Intermediate crude is above $52 and Brent futures, the global benchmark, is now above $55. As prices began to rise in 2016, oil producers started to bring rigs back online. The number of oil rigs operating in the US climbed to the highest level in a year last week. Combined gas and oil rigs online rose to 658, the highest since Jan. 8, 2015.

RBC's prior concerns with the oil company were due to depressed gas and oil prices , which may have meant a weak divestment market and depressed cash flows. The recent deals to cut production have reduced those concerns as have improving economic conditions for European gas where Shell has the second-highest exposure behind Statoil.

Shell has the ability to outperform its peers if it continues with its divestment program while generating consistent cash flow growth, the analysts said.

"We think Shell is past the point of peak net debt, and we expect the balance sheet to improve going forward, leading to the potential for the dividend yield to contract," RBC said in the report.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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