UBS has taken Shell PLC (LSE:SHEL, NYSE:SHEL)down a peg, cutting its rating from buy to neutral and trimming its price target to 3,000p a share. The bank thinks the stock has lost some of its shine after a 12% rise this year and no longer looks cheap enough to warrant a more bullish call.
Shell’s rally has been built on a string of cash flow beats, helped by lower operating costs. UBS still sees the group as a core holding for many investors, with the sort of balance sheet and hard-to-replicate businesses that make it a heavyweight in global energy. The problem, in the bank’s view, is valuation. Once you factor in the medium-term challenges around replacing reserves and a more limited growth outlook, the current share price looks harder to justify.
The bank’s analysts say Shell remains the most defensive option in a downturn. It has the lowest dividend breakeven in the sector at roughly $43 a barrel and a strong balance sheet with net debt at around 21% of capital.
Operating costs are more than 10% lower than two years ago and management has identified a further $2 billion to $4 billion of savings.
Buybacks have been doing much of the heavy lifting for shareholder returns. Repurchases now account for more than three-fifths of distributions and Shell is on course to cut its share count by almost a third between 2021 and the end of next year.
UBS thinks this pace will now ease off. With the timing of peak oil shifting later and the shares having re-rated, the bank expects buybacks to fall to about $3 billion in the fourth quarter of 2025, a drop of 14% on the previous quarter.
Even on that assumption, Shell would still offer a total distribution yield near 9.9% next year.
The longer-term production picture is less tidy. If Shell takes no further action, output is expected to fall to 2.4 million barrels of oil equivalent a day by 2035, leaving a gap of about 500,000 barrels that needs to be filled through exploration, development or acquisitions.
UBS sees around 700,000 barrels of potential opportunities in the current portfolio, though some may not make the cut on capital or return grounds. At present, the bank reckons only 7% of capital spending is going towards growth, with scope for more dealmaking.
Valuation remains the sticking point. Shell now trades on 6.1 times enterprise value to discounted cash flow, up from 5.1 times at the start of the year. Its free cash flow yield of 8.7% still looks healthy but drops into line with peers once you adjust for growth. UBS also thinks the company’s investment returns have been lagging.
It has trimmed its earnings forecasts for 2026 to 2028 by 4% to reflect weaker chemical profits and a slower buyback rate. The blended valuation, using sum of the parts at $75 a barrel and the cash flow multiple, leaves the bank comfortable with its lower target price.