Shell PLC’s (LSE:SHEL, NYSE:SHEL) free cash flow has become too compelling to ignore, according to UBS, which upgraded the energy giant to a ‘buy’ rating with a revised price target of 3,000p, up from 2,800p.
Despite a 10% decline in Shell’s share price since July, UBS believes the company’s strong financial position and restructuring efforts make it an attractive opportunity in the energy sector.
The report highlights Shell’s free cash flow yield of approximately 14%, the highest among its peers, as a key reason for the upgrade.
This metric measures the cash a company generates relative to its market capitalisation, indicating a highly undervalued stock compared with its robust cash generation.
UBS also notes that Shell’s valuation gap with US oil majors has narrowed to 50 per cent from 70 per cent, with further convergence likely as the company aligns its strategy more closely with American rivals.
The oil major’s share buyback programme is another standout feature. UBS argues it is the most secure in the sector due to the company’s low breakeven oil price of $36 per barrel and a strong balance sheet with net debt at just 14 per cent of capital employed. Unlike competitors,
Shell is not expected to scale back buybacks even if oil prices decline significantly.
UBS also sees potential for $6 billion in cost savings, which would lift medium-term earnings forecasts by approximately 20 per cent.
The Anglo-Dutch giant is already on track to achieve its $2-3 billion cost-cutting target by 2025, and UBS anticipates further savings could be announced at the company’s Capital Markets Day on March 25.
While Shell’s valuation continues to lag behind US counterparts, UBS estimates that closing part of this gap could unlock an additional $112 billion in value, equivalent to 1,500p per share.
With its strategy increasingly mirroring those of US majors, particularly in its energy transition plans, Shell may see this discount further narrow.
The Swiss bank emphasises Shell’s strong positioning across performance metrics, including its superior cash flow return on investment and balance sheet strength, as reasons for optimism.
With its valuation now sitting in the fourth quartile among global peers, the brokerage argues that the stock is undervalued relative to its fundamentals.
Shell’s free cash flow strength, cost-cutting potential, and undervaluation underscore UBS’s confidence in the stock, making it a compelling option for investors seeking resilience and growth in the energy sector.
The shares were up 1.5% at 2,618p.
