Better Oil Plays Than Shell
Royal Dutch Shell (RDS-A) reported sharply higher quarterly results, driven by strong upstream and gas & power segment earnings. The company's E&P arm experienced a 58% jump in profits, aided by high oil and gas prices. While we continue to believe that the group should benefit from the upstream momentum and restructuring initiatives in 2008, we see better investment opportunities in this space.
The company does not compare favorably with its peer group in terms of upstream growth prospects, returns, and costs. The group also remains exposed to continued instability in Nigeria and political interference in Russia.
The last two years were particularly turbulent for Royal Dutch Shell, with massive reserve revisions and a major management reshuffle. While the new management team has made concerted efforts to restore investor confidence by having the group's reserves audited and executing the unification plan, it may be quite a while before the company's credibility is fully restored.
Aside from credibility issues, the group is faced with the daunting task of bridging the gap with its super major peers in terms of reserve lives, upstream growth, and financial returns. We continue to believe that current valuations for both of the group's stocks (RDS.A & RDS.B) adequately reflect these headwinds and offer limited upside from current levels. Our preferred names among the super majors are Exxon (XOM) and ConocoPhillips (COP).
Good Entry Point for Durect
Durect Corporation (DRRX) is engaged in the development and commercialization of pharmaceutical systems to treat various chronic diseases. It utilizes six proprietary drug delivery technologies to develop pharmaceutical systems that enhance treatment capabilities in the areas of chronic pain, cardiovascular diseases, and central nervous system disorders.
The company currently has four products in phase II / phase III development. We also expect the company to enter into a partnership deal for Eladur shortly. This year should be catalyst-filled for Durect. In our opinion, the current share price represents an attractive entry point. We thus rate the shares a Buy.
These products are all addressing large market opportunities primarily in the pain management field. Potential milestones in 2008 include the filing of an NDA for Remoxy in the second quarter of 2008, and the initiation of phase III trials for Posidur in mid-08. Another major catalyst for the company would be the signing of a business deal for its pipeline candidates. Durect already has agreements in place for the development of Transdur-Sufentanil, Remoxy, Posidur and Memryte. Additional partnership opportunities exist for Eladur, TRANSDUR-Sufentanil (for Europe and Asia), and Posidur (for Japan/Asia).
