Royal Dutch Shell

Mannely Goncalves, Nguyet Ly, Jamila Panpinij, Anna Rausa

Company Description● Production of oil and natural gas.● Shell operates in three distinct segments including:

Upstream, Downstream, and Corporate.● 90,000 employees in more than 80 different countries

and territories.● Shell produces 3.3 million barrels of oil equivalent every

day. ● 44,000 Shell service stations worldwide. ● 30+ refineries and chemical plants.

Strengths Weaknesses

Strong market position

Vertically integrated operations

Strong exploration technological capability

Strong research & development capabilities

Violation of anti-corruption laws

Legal proceedings against Shell for oil spills in Nigeria

Opportunities Threats

Expanding GTL technology

Expansion of the Motiva Port Arthur refinery

The Prelude floating liquefied natural gas(FLNG) partnership

Impact of shale gas development on the Shell LNG business

Investments in Iran and Syria

Risks associated with wide geographic presence

Fluctuating prices of crude oil, natural gas, oil products,

and chemicals

SWOT Analysis

Ratio AnalysisLiquidity, Profitability, and Asset

Management

Firm Valuation: DDM

● Po = Do (1+g) / (r - g) ● Do = $1.72 (as reported in Shell’s 2012 annual report)● Constant growth rate = 2.1%

o expected growth rate from 2014 - 2020 (from Forbes)

Shell’s Dividend Growth Rate

● Ways of estimating g:o researched the rates predicted by different financial

analystso analyzed the company’s potential for growth in the

futureo calculated the dividend growth rate by computing the

growth rates over the past nine yearso using the formula g = ROE * plowback ratio

Rates from Different Reports

● Stock Analysis on Net = 7.38%● Motley Fool = 2.33%● Bloomberg = 2.67%● Yahoo Finance = 4.70%● Morning Star = 4.61%

Company’s Potential for Growth

● Shell’s strategy for 2013:o increase investments in new engines, explorations,

and drillingso expand into new territorieso seek out new growth opportunitieso expected to bring in $33 billion of net capital

investment in 2013 (compared to the $30 billion of net capital investment in 2012)

Year DPS Dividend Growth Rate

2012 1.72 2.38%

2011 1.68 0.00%

2010 1.68 0.00%

2009 1.68 5.00%

2008 1.6 11.11%

2007 1.44 13.39%

2006 1.27 12.39%

2005 1.13 5.61%

2004 1.07

g = ROE * plowback ratio

● most recent ROE (from Yahoo Finance) = 11.67%

● plowback ratioo DPS from 2012 = 1.72o EPS from 2012 = 4.25

● g = 0.1167 * [ 1 - (1.72/4.25)] = 6.95%

Estimation of g

● g ranges widely from 0% to 13.39%● We estimated g to be 5%

o Based on SWOT analysis and analysis of firm’s riskiness

o No increase in g for 3 years in a row until 2012

CAPM: r = rRF + (RPm)βi

● rRF = 3.81% (30-year U.S. Treasury Bond Yield)

● RPm = 5% (as recommended in class)

● βi = 1.042097

● r = 0.09 = 9%

Shell’s Valuation using DDM

● Po = Do (1+g) / (r - g)

o Do = 1.72o g = 5%o r = 9%o g = 2.1%

● Po = $26.17

Firm Valuation: Using Multiples

(Royal Dutch Shell’s “most recent” Earnings/Share)(Industry P/E ratio)

(6.74)(9.20)= $62.01