Barclays moves to ‘underweight’ on Shell as analysts question the energy supermajor’s valuation and medium-term uncertainties.
PLC () ‘screens better’ for ESG (Environmental, Social, Governance) but its industrial performance is lagging its peers, that’s according to Barclays which today downgrades the energy supermajor to ‘underweight’.
Shell’s ESG position is helped by its bias towards gas, according to the bank’s analysts, who however added that it is not enough to offset the impact of weaker corporate metrics.
The analyst sees Shell’s decision to cut its dividend by two-thirds as “the right decision for the long term”. Questions over the business strategy remain, he added.
Barclays forecasts anticipate a material uplift in Shell’s free cash flow in 2022 and 2023, which is described as “by far the highest level of the sector”.
Barclays said: “Yet the capital allocation strategy and how this FCF may be used does need further explanation to us. In particular, Shell’s medium-term capex outlook remains a key uncertainty, as well as its willingness to do M&A, the speed of the transition to renewables and ultimately what the dividend profile will look like over time.
“These are important questions that we believe the company can and will address, but until those firm answers are provided we believe they are likely to act as an overhang on the shares.”
Shell’s next strategy update in anticipated in February which, as Barclays points out, is six months away.
On valuation, the Barclays analyst said: “having underperformed the sector, the stock screens as being cheap on multiples but also expensive on dividend yield.
“It is the latter that bothers us most and although we see the company’s focus on building a simpler, more consumer-focused business as eventually enabling a return to dividend growth, we see others in the sector as being able to move more quickly.”
The ‘underweight’ rating comes with a 1,500p per share price target, compared to a current price of 1,088p.