HSBC has upgraded Shell (LON: SHEL) to Buy from Hold and raised its price target to 3,700 pence from 3,350 pence, arguing that the energy major’s valuation discount to rival TotalEnergies is unjustified given Shell’s stronger distribution yield and lower exposure to Middle East disruption.
Analyst Kim Fustier cited higher cash flow estimates and improved medium-term upstream growth visibility following Shell’s acquisition of ARC Resources as the primary drivers of the upgrade.
The ARC deal, the firm said, has meaningfully narrowed the gap in upstream visibility that had previously weighed on Shell’s relative valuation.
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Furthermore, HSBC believes Shell’s discount to TotalEnergies is unwarranted as Shell offers a higher distribution yield, carries less exposure to Middle East geopolitical risk and has seen its upstream visibility profile improve materially.
Those factors, combined with the revised cash flow outlook, make the current valuation an attractive entry point in the firm’s view.
Shell shares have risen approximately 20% year to date, buoyed by surging oil prices tied to the ongoing conflict in Iran. However, the stock has given back around 2.8% over the past month after its sharp run higher, creating the opening HSBC is now flagging.
Not all analysts share that optimism. Erste Group moved in the opposite direction earlier this month, downgrading Shell to Hold from Buy on the view that elevated energy prices are providing a temporary boost to revenues and profits that is unlikely to persist, with earnings expected to moderate in the year ahead.
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