Royal Dutch Shell PLC (LON:RDSB) received a boost on Tuesday after Deutsche Bank upgraded its recommendation on the oil giant's shares to ‘buy’ from 'hold' and raised its price target to 2,700p from 2,650p.
Deutsche Bank said Shell has a solid cash flow outlook and it sees scope for up to 50% of the oil giant’s market capitalisation of US$125bn to be returned to shareholders over the five years to 2025 via dividends and share buybacks.
It sees dividend per share growth of 15% over the five-year period, or 3% per year, as a “realistic objective”.
READ: Shell boss Ben van Beurden boasts of “strong start” to 2019
Shell is set to host its capital markets day on June 4 when Deutsche Bank expects the company will emphasise its strong cash potential.
Strong cash flows
“We expect Shell to guide towards $60-65bn of cash flow from operations by 2025 at a US$65 per barrel (bbl) oil price, a US$10bn advance on its 2020 guidance,” the investment bank said.
The bank also sees Shell stressing continued discipline on capital expenditure, holding its guidance at US$25-US$30bn.
Allowing for some US$5bn of annual divestment flow, the capex guidance suggests annual free cash flow available to the business of US$40-45bn, Deutsche Bank said.
“Taken together we see a business that via the sustenance of its existing franchises and delivery of ongoing projects should be capable of delivering a circa $10bn uplift in operating cash flow. Aggressive? We think not, given that the improvement of US$5bn arises from Chemicals and Marketing, $2bn from LNG expansion (not least the build in Canada and already contracted LNG marketing volumes) and the balance from the Shales, a business area in which Shell now has critical mass and good opportunities for growth,” it added.
Dividend distribution modestly above peer average
On returning cash to shareholders, Deutsche Bank said Shell needs to reduce the call of the annual dividend upon its operating cash flows if its business model is to be more robust over the long term.
“Having said this we believe it is also important to recognise that upon completion of its current US$25bn buy-back programme, Shell's dividend distribution will be only modestly above the peer average at circa 32% of its estimated US$60/bbl 2020 operating cash flow.”
In late morning trading, Shell shares edged up 0.8% to 2,478p.