RBC Capital Markets has downgraded Shell Plc, moving the recommendation from "outperform" to "sector perform" while lowering its price target to 3,200p from 3,600p. The change was communicated in a note dated Monday, with Shell shares last priced at 2,687.50p on the London Stock Exchange at the prior session's close.
In its analysis, RBC said Shell is effectively "running uphill" as it seeks to execute a restructuring of its chemicals business amid what the broker characterized as difficult market conditions. The bank highlighted ongoing portfolio concerns and said those issues could continue unless Shell addresses them through inorganic measures.
RBC also flagged headwinds in Shell's international gas operations and trading activities. The note said the company's balance sheet capacity has been reduced, which in RBC's view increases the risk that Shell's valuation multiple will remain discounted relative to peers.
The analysts described Shell's investment case as a free cash flow per share growth story that relies on restructuring and stability across core businesses. They noted that growth is centered on liquefied natural gas while liquids production is intended to be sustained rather than increased.
RBC further observed that since new management assumed control in early 2023 the broader political environment has shifted and energy security has moved higher on the agenda. The brokerage said investor focus has shifted toward growth prospects rather than distributions. Against that backdrop, RBC observed that Shell's valuation multiple has not expanded relative to the sector, despite a reduction in share count of more than 25% since the pandemic.
RBC's revised price target of 3,200p implies approximately 23% upside from the cited closing share price. The bank also outlined scenario estimates: a downside case at 1,500p, representing a roughly 40% decline from the referenced price, and an upside case at 4,100p, equivalent to about 57% upside.
The note listed Shell's dividend at 1.45 with a yield of 3.9%. RBC reported a market capitalization of 158,531 million and an average daily trading volume of 5,926,181 shares.
Summary
RBC's downgrade reflects a combination of operational and portfolio pressures at Shell, including difficulties in chemicals restructuring, trading and international gas exposure, and a smaller balance sheet capacity. The brokerage's new price target and scenario analysis provide a range of potential outcomes while noting that the company's share count has fallen by more than 25% since the pandemic.
Key points
- RBC reduced Shell's rating to "sector perform" and cut the price target to 3,200p from 3,600p.
- Primary headwinds identified are chemicals restructuring challenges, international gas and trading pressures, and reduced balance sheet capacity; these factors may keep the valuation multiple discounted.
- RBC's scenario range spans a downside of 1,500p and an upside of 4,100p, with the revised target implying about 23% upside from the cited share price. Sectors impacted include energy, commodities trading and capital markets.
Risks and uncertainties
- Persistent difficulties executing the chemicals restructuring could prolong underperformance in the chemicals segment - affecting the chemicals and broader energy sectors.
- Ongoing headwinds in international gas and trading could weigh on earnings and cash flow - impacting energy and commodities trading markets.
- Reduced balance sheet capacity may limit strategic flexibility and raise the risk of a sustained valuation discount - with implications for investor sentiment in capital markets.