RBC lifts target price, reiterates 'outperform' on Shell

Royal Dutch Shell shares gained on Wednesday after RBC Capital Markets lifted its target price on the stock to 2,000p from 1,9000 and reiterated an ‘outperform’ rating.

The oil producer on Tuesday announced plans for more asset sales and cost-cutting over the next few years amid lower oil prices.

Shell will exit oil and gas operations in up to 10 countries and sell 10% of its production as part of a $30bn asset sale plan by 2018. The group lowered its planned 2016 capital expenditure (capex) to $29bn, with exploration set at $2.5bn, in a third cut from an initial $35bn.

The company also said it expected to save another $1bn from its takeover of BG Group. Chief executive Ben van Beurden confirmed that Shell was cutting another 2,200 jobs after the BG deal, on top of the 2,800.

“Management's hardceiling on capex is a clear positive, in our view, although this commitment is likely to be tested over time,” RBC said.

“We see this commitment as significant, in particular for the dividend focused community, as many had likely feared that any oil price increase would ultimately lead to higher capex. While we do think this is likely to be the case for some oil companies, we think Shell’s focus on dividend sustainability means additional capex will have to compete with the buyback programme from now until 2020.”

RBC said it continues to believe Shell has some of the best project optionality in the peer group and its rigorous capital allocation process should support the investment case in the long run. The BG Group acquisition brings project optionality with the introduction of BG's Brazil assets and liquefied natural gas volumes likely to kick-start the high-grading process, the broker added.

In the short term, however, RBC said cash flows are likely to be outstripped by Shell’s capex and dividends so confidence on divestments could weigh on investor sentiment.

“We remain positive, and think Shell should remain a core energy holding for longer term investors.”

Shares rose 1.62% to 1,784p at 0956 BST.