ROYAL DUTCH SHELL PLC(RDSA.L)：UPGRADE TO BUY

Deutsche Bank Markets Research Rating Buy Europe Netherlands Oil & Gas Integrated Oils Company Royal Dutch Shell plc Date 23 June 2015 Recommendation Change Upgrade to Buy Reuters Bloomberg Exchange Ticker RDSa.L RDSA LN LSE RDSa ADR Ticker ISIN RDSA US7802592060 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E DB EPS (USD) 3.10 3.57 2.23 2.70 3.27 % Change 0.0% 0.0% 15.3% -12.4% -10.7% P/E (x) 10.7 10.5 13.2 10.9 9.0 Dividend Yield (%) 5.4 5.0 6.4 6.4 6.6 Source: Deutsche Bank estimates, company data An impending restructuring story with FCF supported yield ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 23 Jun 2015 (GBP) 1,864.00 Price Target (GBP) 2,425.00 52-week range (GBP) 2,453.00 - 1,843.50 Lucas Herrmann, ACA Research Analyst (+44) 20 754-73636 lucas.herrmann@db.com Mark Bloomfield, ACA Research Analyst (+44) 20 754-57905 mark.bloomfield@db.com Key changes Rating Hold to Buy ↑ Source: Deutsche Bank Price/price relative 1800200022002400260028006/1212/126/1312/136/1412/14Royal Dutch Shell plFTSE 100 INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -4.8 -9.2 -22.8 FTSE 100 INDEX -2.9 -2.8 0.0 Source: Deutsche Bank Shell/BG: Aggregate FCF expectations -10000-50000500010000150002000020002001200220032004200520062007200820092010201120122013201420152016201720182019202020212022202320242025FCF from LNG/IG ($m)Aggregate LNG FCFLNG Trading LNG onstream 2014 FCFLNG start-up post 2014 FCF Source: Deutsche Bank; Wood Mackenzie Our reasons for upgrading Shell are clear. In our view the Shell dividend is sustainable; the BG transaction with all its strategic logic will proceed; the restructuring possibilities at Shell assuming its completion are substantial; management intent to reshape Shell ‘legacy’ is decided; and with the shares now trading at a 6.3% dividend yield (or c4.4% on an ex-scrip basis) they trade at a level from which we see limited relative or, indeed, absolute downside. At 2425p we leave our 12-mth price target unchanged but with the risk/reward balance now firmly in our favour adopt a more constructive Buy stance. At an 8% discount to offer value, BG (Buy 1460p) is our preferred route to entry. Multiple reasons for the fall– playing to a common theme A torrid start to 2015 has seen Shell underperform its peers by c15% and its sector yield relative move to levels not seen since the 2004 reserves debacle. The reasons have been multiple but the thrust of them all too clear. At a time when the commodity outlook is uncertain, Shell’s response to the macro backcloth has lacked caution and its view of the future appeared over-optimistic. With the company seemingly reluctant to aggressively balance its cash cycle, the sustenance of dividend has yet again been called into question. LNG: A focus of this note with our analysis suggesting a cash wall is coming Yet push into the outlook for key Shell activities, not least in light of its offer for BG, and our growing impression is that the market is now in danger of losing balance. Nowhere does this seem more valid than in the focus of this note, LNG. In contrast with market perception, impending project start-ups see cash flow rise to $17bn by ’18 (from $12bn in ‘14) – strongly supportive of dividend. Moreover, combine the BG/Shell trading portfolios, and our analysis suggests a business with limited near term 'spot' exposure but notable ($0.5bn) scope for logistics optimization. This is to say nothing of the compelling strategic logic of a BG/Shell LNG combination at a time of structural market change. Valuation & Risk (see p.3 for additional commentary) With cash flow from LNG set to surge and that from a reshaped Downstream once again material, we believe Shell’s current 6% plus DY is well supported – a strong source of downside protection. As significant, however, is our perception that with the BG bid premium now largely written out of equity value and management committed to the delivery of $30bn of divestments, predominantly to retire deal-related equity, Shell into 2016 will have all the hallmarks of a major restructuring play in which investors are paid to wait. Targeting a 5% forward yield, a 10% discount to sector, we leave our PT unchanged but raise to Buy. Main risk? The BG offer collapses.