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: Goldman downgrades Shell over ‘relatively expensive’ valuation versus competitors

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Shares in Shell dropped 2% on Monday as Goldman Sachs downgraded the big oil company as its period of “outperformance” led to “a relatively expensive valuation vs peers,” its analysts said.

Cutting the firm down from buy to neutral, the Goldman Sachs analyst team led by Michele Della Vigna said in its research report on big oil that Shell
SHEL,
-1.11%

SHEL,
+0.56%

had “above-average” valuation compared to its competition.

The report highlighted how the EU big oil sector
SXEP,
+0.50%

generated a “strong” free cash flow generation in the third quarter amounting to $44.8 billion.

While Della Vigna decreased his 12 month price target in Shell from €40 ($39.91) to €38, he said Shell had screened “very favorably” in 2022, offering $18.5 billion in buybacks as well as its dividend commitments.

“On our estimates, we expect Shell to offer circa 8.7% total returns to shareholders in dividends and buybacks, which considerably lags the peer average of 11.6%. In this context, we find more attractive combinations of dividends and buybacks across our coverage,” he added.

The team pointed out the biggest risks to changes in its ratings included lower prices, changes in recovery rates in mature offshore oil and gas fields and higher-than-expected costs and/or capital expenditure in its future development.

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Conversely, the team upgraded Portuguese oil refining company Galp
GALP,
+2.27%

from neutral to buy and raised its yearly price target to €16, up from €15. It branded Galp as one of the most able firms to sustain high cash flows in the EU bio oil sector in the next five years.

Shares in the energy company were up 2% during Monday afternoon trading in Lisbon.

Della Vigna’s team said that while Galp has galvanized positive earnings from high oil benchmarks – especially in Brent oil
BRN00,
+0.67%

– their shares have lagged such revisions.

“However, we now believe the company is a good mean reversion opportunity in the nearer term as the slowdown in key macro indicators has seen oil-focused players such as Galp being the most shielded in the fourth quarter, as shown in our quarterly commodity exposure index,” Della Vigna said.

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