Shell still top pick after shares upgrade
This is the only European oil major that will cut debt in 2025 and sustain current levels of distributions to shareholders, believes this analyst.
7th January 2025 16:17
by Graeme Evans from interactive investor
The top pick status of Shell (LSE:SHEL) was reinforced today by a City bank’s forecast that the oil giant will be the only one of Europe’s big players to sustain distributions in 2025.
Morgan Stanley expects Shell’s financial resilience to be the key driver for shares during this year, leading to a target price of 3,070p alongside an Overweight recommendation.
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It said Shell was the only energy major for which 2024 net debt estimates have fallen, reflecting improved cost and operational efficiencies as well as constrained capital expenditure.
The bank told clients that there was a long history in the sector of majors with improving balance sheets outperforming those with weakening ones.
It said that Shell was the only major for which it comfortably models excess room in its financial framework, even with conservative commodity price assumptions.
Today’s report said: “We expect that BP (LSE:BP.), TotalEnergies SE (EURONEXT:TTE), Eni SpA (MTA:ENI) and Equinor ASA ADR (NYSE:EQNR) will all distribute lower dividends and buybacks in 2025 than 2024, but this is not our expectation for Shell.
“To add to this, even if Shell maintains its $3.5 billion quarterly buyback, net debt continues to fall – unlike others, where we assume lower distributions.”
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In what’s likely to be a meagre year when it comes to commodity prices, Shell's improving balance sheet and ample free cash flow cover are seen as “differentiating factors”.
This means Morgan Stanley sees the potential for Shell to announce a sizeable one-off share buyback – a catalyst that would likely boost the shares further.
The bank had an Overweight recommendation on Shell throughout the post-Covid recovery period up until January 2023, by which time the price had recovered to 2,350p. That’s when the broker downgraded the shares to Equalweight.
This was also about the same time as the arrival of chief executive Wael Sawan and the beginning of a 10-quarter period labelled as “the sprint”– a period of focus on internal reorganisation, portfolio pruning, cost efficiency and capital discipline.
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The strategy has been deemed a success after Shell delivered earnings consistently ahead of expectations and without the levels of volatility seen at rival BP.
The bank said: “What lies after the sprint is still a key question, but for 2025 we expect Shell's financial resilience to be the key share price driver.”
Shell is due to publish a trading update tomorrow before annual results on 30 January and a capital markets day on 25 March.
Morgan Stanley expects that Shell will lay out a path that puts the emphasis firmly back on upstream oil and gas, with a growing share of earnings coming from trading.
It added that continued support for buybacks and further balance sheet de-gearing would make the equity story “hard to beat, especially if we are correct that the commodity price environment will be somewhat modest.”
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