UBS cuts Shell to “neutral,” warns stock ‘no longer cheap’ after strong rally

Investing.com -- UBS in a recent note downgraded Shell to “neutral” from “buy,” saying the stock has lost its valuation appeal after a strong run this year.

The brokerage cut its 12-month price target to 3,000p from 3,200p, citing stretched multiples and emerging medium-term challenges.

Shell shares are up 12% in 2025 in local currency, supported by seven consecutive quarters of cash flow beats and buybacks, according to the report. 

UBS said that the stock “no longer screen as cheap on multiples,” despite continued confidence in Shell’s financial footing and defensive position within the sector.

Shell now trades at an EV/DACF of 6.1x, compared with 5.1x at the start of the year, the report said. 

UBS added that Shell’s free cash flow yield of 8.7% falls in line with peers after adjusting for lower growth allocation, noting that only 7% of capex is directed toward growth, below rivals such as Equinor and OMV.

UBS warned that buybacks are likely to slow, saying it expects repurchases to fall to $3 billion per quarter from Q4 2025, a 14% sequential reduction. 

Shell’s share count is already down about 29% versus 2021. The shift would push the payout ratio to about 52% before gradually easing, UBS said.

The brokerage highlighted a medium-term resource replacement challenge, projecting that Shell may face a production gap of roughly 500kboe/d by 2035 if no additional action is taken. 

UBS identified about 700kboe/d of potential pre-FID projects but said some historically struggled to meet capital return thresholds.

UBS also cited risk to Shell’s valuation from expected lower LNG prices as new global liquefaction capacity comes online. The report forecasts LNG declining from about $13/mmBtu in 2025 to $11.5 in 2026 and $10.5 in 2027.

Analysts reduced their EPS estimates by an average of 4% for 2026-28 based on weaker chemical earnings and a slower buyback rate.

The cuts drove the 6% price-target reduction to 3,000p, set using a 50/50 blend between a $75/bl SOTP framework and a 6.0x EV/DACF multiple.

UBS said Shell remains the most defensive major given a dividend breakeven of about $43/bl and net debt to capital of about 21%.