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Goldman Sachs on Monday downgraded Shell over what it views as overvaluation compared to its supermajor peers.
The European Union’s big oil sector, SXEP, has generated what Goldman Sachs referred to as a “strong” free cash flow of $44.8 billion in the most recent quarter, yet Shell’s “outperformance” has resulted in “a relatively expensive valuation vs peers”.
In a research report, Goldman Sachs downgraded Shell from “buy” to “neutral”, citing “above-average” valuation compared to competitors.
Shell (SHEL) saw its share price shed 2% on Monday immediately after the downgrade, before recouping losses for a 0.26% gain on the day as of 12:08 EST.
Goldman Sachs’ Michele Della Vigna’s new 12-month price target for Shell is now 38 euros, down from 40 euros.
The downgrade and the price target drop, however, do not take away from the fact that Goldman Sachs still views Shell “very favorably” for this year, particularly in light of its massive buyback program of $18.5 billion, combined with its dividends.
Goldman Sachs estimates that shareholders of Shell will see 8.7% in total returns in dividends and buybacks this year. Compared to Shell’s peers, that number is less impressive when the average is 11.6%.
“In this context, we find more attractive combinations of dividends and buybacks across our coverage,” MarketWatch cited Della Vigna as saying in the report, highlighting that lower prices, unanticipated CAPEX increases and any unforeseen changes in offshore recovery rates could result in further assessments of ratings.
By Charles Kennedy for Oilprice.com
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Charles is a writer for Oilprice.com