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Investing.com -- Wolfe downgraded Shell to Peer Perform from Outperform, warning that the oil major’s decision to maintain its $3.5 billion quarterly share buyback could raise leverage and ultimately erode equity value if funded through debt.
Shell’s cash flow, once adjusted for lease payments and interest costs, leaves little room to sustain buybacks without balance sheet strain.
By Wolfe’s estimates, continuing buybacks at the current pace would expand net debt by $1 billion to $2 billion per quarter and lift gearing to about 20% within five years, up from 7.5% at the end of June.
Wolfe argued that Shell’s approach relies on management’s assumption that oil prices will stay above $80 a barrel through 2030, which is an optimistic view given the current strip near $68, accd to Wolfe.
“Buybacks do not create value — and when funded by debt, they will erode equity value,” analysts said.
The downgrade follows a more than 20% rise in Shell’s shares since January.
“After a strong recovery since our Jan upgrade, we struggle to see how that supports material upside at strip,” analysts said.
The firm said the recent rally leaves limited upside unless oil prices rise meaningfully above current levels.
Shell’s latest trading update showed a solid quarter operationally, led by stronger refining utilization and LNG performance, though headline profit was trimmed by non-cash charges in Brazil.
“Shell’s trade statement is solid. A bigger focus is another prospective cash burn to fund buybacks that erode equity value when funded by debt.