The firm estimates as much as 31% near-term upside for the oil and gas giant
Royal Dutch Shell plc (NYSE:RDS.A) has been upgraded at Goldman Sachs from Buy to Conviction Buy. Henry Tarr, analyst at the firm, believes the stock has 31% near-term upside potential, given the improvement in the company’s expenditure.
Shell’s dividend yield is believed to be the highest among all the stocks covered at Goldman Sachs, however, Mr. Tarr expects the figure to drop in the near term owing to profitability growth. The company is currently undergoing a short scale transition. The impact will likely improve cost management and cut expenditures, provide better directions in capital usage, and management policies for BP acquisition would be properly synergized and disposal management. The expected improvement in oil and gas prices over the next few months would also be helpful in deriving further growth. The additional profitability will expand the dividend cash coverage multiplier, leading to a fall in dividend yield percentage over the next year. The acquisition of BP plc, owner of Castrol, will likely provide an incremental volume growth in Brazil and South America. The capital efficiency is likely to be more disciplined and properly managed as far as project selection is concerned, and will reduce the capital expenditure significantly in over the next two years.
The management received quite a dose of criticism over the BP merger, but nevertheless decided to go through with it. As far as analysts are concerned, they view the deal as constructive on grounds that the quality of BP assets is second to none and Shell management possesses the ability to use them to their full potential, while BP management could not have done that.