RBC downgrades Shell to 'sector perform'

Analysts at RBC Capital Markets downgraded oil giant Shell to 'sector perform' on Wednesday, citing three key reasons for the move.

RBC took a fresh look at the company's financial framework and concluded that a further $30bn in buybacks was needed post-2020 in order to reduce the firm's dividend burden, in turn "restricting its ability to high-grade its portfolio over time".

The Canadian bank felt that with ongoing uncertainty in the macro landscape and energy transition, Shell's dividend was "too much of a burden" over the medium-term, meaning its buyback was out of necessity, not choice.

"The current commitment to buyback ~$25bn over 2018-20 could reduce Shell's share count from 8,300m to ~7,500m by 2020, however, we think this is just the beginning," said RBC.

While it was not the sole driver of its downgrade, RBC also said Shell had screened poorly on its forward-looking reserve life analysis, something that "certainly does not help the investment case", even if it was less of a critical variable for Shell that for some of its peers.

That said, RBC still saw the potential for capex to surprise to the upside through inorganic activity, with consensus factoring in spending at the low end of Shell’s guided $25-30bn range.

Lastly, the analysts pointed out that Shell's all-in breakeven was higher than for its sector rivals.

"Combining capex, dividend, buyback and potential incremental spending on resources we see the oil price required to fund its financial framework as higher than peers, and on our price deck we see free cash flow yield lagging TOTAL, while Shell trades on a higher valuation, with greater uncertainty on the portfolio outlook."

In addition to the rating downgrade, RBC also dropped its price target on Shell to 2,750p from its previous 2,900p mark.