Morgan Stanley stays 'overweight' on Shell, expects dividend to grow again

They also expected the company's shares to outperform and bumped up their target price from 1,630.0p to 1,815.0p.

Brent crude oil prices had risen from $61.0 a barrel in the first quarter to $69.0 over the three months to June, alongside strengthening natural gas prices.

Yet the company's share price had trailed the company's earnings outlook "considerably" - although they expected that would change.

The reason in their opinion for that disconnect was the uncertainty that investors faced around the energy transition, on top of the sector's "mixed at best" track record over the past decade when it came to capital allocation.

Hence, investors were relying on just the Dividend Discount Model to value firms in the sector, "giving little credit for cash flow retained within companies."

However, they estimated that Shell would announce a share buyback programme of approximately one billion dollars per quarter for the back half of 2021.

That would be followed "eventually" by a recovery in its dividend from $5.4bn at present back to $8.0-8.5bn.

"Even that dividend leaves funds for ongoing buybacks and net debt reduction," they added.

At the sector level, aggregated net income for Integrated European Oils were set to swing from a loss of $6.6bn in the first quarter to $13.6bn in the second quarter.

For the five majors that was expected to result in their free cash flow reaching $13bn, which was more than double their cumulative quarterly dividend of $6bn.