BofA-ML sees 'blue skies' ahead for Shell, hikes target price

Shell 'B'

1,894.60p

17:05 28/01/22

-1.24%

-23.80p

Analysts at Bank of America-Merrill Lynch hiked their target price on shares of Royal Dutch Shell after factoring-in the company's transition from 'Big Oil' to 'Big Energy', implying a shift away from valuations based on discounted cash flows as the company develops its 'premium multiple' businesses, including: Integrated Gas, Chemicals, Marketing, and 'New Energies such as bio-fuels as well as low-carbon electricity.

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That process, they said, should see the company's shares re-rate away from DCF-based valuations of under 2,850.0p towards a blue-sky scenario as it morphs into a "supermajor 2.0".

Hence, BofA-ML revised its target price for the shares from 2,660.0p to 3,100.0p.

They estimated that Shell could organically cover its shareholder returns commitments with Brent at $55.0 a barrel, but with its sensitivity to the oil price set to fall as growth capital expenditures lifted cash flows from liquid natural gas, chemicals, marketing and low-carbon electricity by roughly 60% by 2025.

And under the assumption that Shell will step-up its annual share buybacks towards $12.0bn per year through 2025, that would translate into a compound annual growth rate in the company's dividend per share of 4.0% over the same time-frame, even as annual dividend payments declined from $16.0bn at present to under $14.0bn by 2025.

At the then current share price, BofA-M estimated that Shell would repurchase approximately 30% of its shares by 2025.

BofA-ML kept its recommendation on Shell stock at 'buy'.