HSBC downgrades Shell to “hold” on debt concerns, fading trading profits

Published 04/08/2025, 11:22
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Investing.com -- HSBC has downgraded Shell Plc to “hold” from “buy,” citing a near 50% projected rise in net debt, weakening trading profits, and a valuation premium no longer justified against peers, in a note dated Monday. 

The target price was raised slightly to 2,950p from 2,900p, implying a modest 9% upside from the August 1 close of 2,707p.

Shell’s net debt is forecast to exceed $60 billion by 2027, up from $43 billion in Q2 2025. 

This increase is driven by cash shortfalls, as forecast operating cash flow of about $40bn annually from 2025-2027 falls short of covering capital expenditures ($20–22 billion), dividends and buybacks ($22.5 billion), and lease payments ($5 billion). 

HSBC expects gearing to climb from 19% to the mid-to-high 20s% by 2027, approaching post-BG acquisition levels.

Trading earnings, especially in Integrated Gas, are under pressure as energy markets normalize. 

Shell’s earnings from trading make up an estimated 25% of post-tax income, compared to 20% at BP (NYSE:BP) and 10–15% at TotalEnergies (EPA:TTEF). 

HSBC forecasts a return on average capital employed (ROACE) contribution from trading of around 2%, the bottom of Shell’s 2-4% guidance range and in line with the 10-year average. Integrated Gas NOPAT forecasts for 2025-2027 were cut to 12% below consensus.

Shell’s valuation premium is also under scrutiny. The company trades at a 10–15% premium over TotalEnergies on 2026 EV/DACF and P/CF multiples, despite a lower 2026 distribution yield of about 11% versus Total’s 13%. 

HSBC sees no basis for this premium, as both firms face similar funding gaps and debt trajectories.

HSBC reduced Shell’s 2025–2027 net income and cash flow estimates by 4% and 5%, respectively. 

This reflects weaker trading and deeper losses in Chemicals, only partly offset by stronger Upstream and Marketing performance. 

Revised 2026 earnings and operating cash flow forecasts now stand 5% below Bloomberg consensus. EPS estimates were lowered to $2.98 in 2025 and $3.16 in 2026, from previous estimates of $3.21 and $3.24.

The firm maintains its $3.5 billion quarterly buyback for Q3, though the projected payout ratio will rise to 51-52% over 2025-2027, breaching Shell’s stated 40-50% range. Shell does not currently have a fixed gearing target, unlike peers.

HSBC also noted that lease payments, revised to $5bn annually, reduce Shell’s 2026 free cash flow yield to 6.3%, versus 8.7% before leases, creating a funding gap of over $9bn, or 4% of market capitalization. Disposals are unlikely to bridge this gap alone, based on recent divestment trends.

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