City backing drives Shell shares to seven-month high

Support for the re-rating of Shell (LSE:SHEL) flowed through the City today after share price targets were lifted as far as 4,000p on the back of the company’s updated financial objectives.

Shell topped the FTSE 100 index by mid-afternoon, meaning the stock has advanced almost 4% since Tuesday’s strategy update to trade at its highest level since August at 2827p.

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The company has outperformed peers in terms of total shareholder returns since 2023, when new chief executive Wael Sawan began a programme of internal reorganisation, portfolio pruning, cost efficiency and capital discipline.

That strategy has been deemed a success after Shell delivered earnings consistently ahead of expectations and without the levels of volatility seen at rival BP (LSE:BP.).

However, Sawan said yesterday that the company has not “fundamentally re-rated”.

Rekindling the old City message that “you can be sure of Shell”, Sawan raised the bar on various key financial targets in yesterday’s New York strategy presentation.

These include the lowering of capital expenditure guidance to between $20-22 billion (£15-£17 billion) a year, an increase in cost savings and a step up in shareholder distributions to 40-50% of cash flow from operations.

A view that Shell remains cheap in valuation terms means the returns will continue to be driven by buybacks, having repurchased 21% of its shares in the last three years. The strategy suggests that a further 40% of its share count could be targeted in the period up to 2030.

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The dividend has risen 25% since 2023, with Shell sticking to its current policy of 4% annual increases in yesterday’s update. It expects to be able to cover dividends at an oil price of $40 a barrel and buybacks at $50, which compares with a current Brent crude price above $72.

US bank Jefferies said the preference for share buybacks over dividends will continue to be a significant topic of discussion in the upcoming quarters, particularly if the reduction in share count does not lead to a valuation re-rating versus peers.

It expects Shell to keep payouts at a ratio of 40-45% in the current macro environment, while the upper end of the range is likely to be targeted in periods of lower prices.

While buybacks remain the favoured method of shareholder returns, Jefferies said it wouldn't rule out a one-off dividend increase later in 2025 or in 2026.

The bank has a price target of 3,300p, while UBS is at 3150p after taking a number of positive features from the event.

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It said annual capital expenditure of $20-22 billion over the 2025-28 period was a reduction of 11% versus the previous guidance and compared with its estimate of $23 billion.

This mainly reflected a cut to spending within the downstream and renewable segments, as well as a lower budget for M&A , which has been set at $1-$2 billion a year.

Shell expects to deliver a further $2-4 billion of cost savings by the end of 2028, taking cumulative cost reductions to $5-7 billion versus 2022.

UBS thinks the target can be exceeded, having previously highlighted room for a further $6 billion of incremental savings if Shell is able to take its operational expenditure intensity back to the 20-year average.

Analysts at Barclays are among the most optimistic in the City after today lifting their price target to 4,000p from 3,600p, with an Overweight recommendation. Counterparts at RBC have moved to 3,800p from 3,500p with an Outperform stance.