Shell Downgraded as UBS Warns Shares Are ‘No Longer Cheap’

Broker cites stretched valuation, slowing buybacks and long-term production risks as key reasons for its neutral stance

UBS has downgraded Shell from “buy” to “neutral”, arguing that the oil and gas major has lost much of its valuation appeal after a strong rally in 2025. The bank also cut its 12-month price target from 3,200p to 3,000p, highlighting stretched multiples, weakening earnings momentum and emerging long-term operational challenges.

Strong Performance Has Made Shell Expensive, UBS Says

Shell shares have risen 12% so far in 2025, supported by seven consecutive quarters of stronger-than-expected cash flow and aggressive share buybacks. However, UBS now believes the stock looks fully valued.

Key concerns raised include:

• Shell “no longer screens as cheap on multiples”.
• EV/DACF has increased to 6.1x, up from 5.1x at the start of the year.
• Free cash flow yield now sits at 8.7%, broadly in line with peers once lower growth capex is considered.

UBS stressed it still views Shell as financially robust, but the valuation backdrop “limits upside potential”.

Buybacks Expected to Slow Significantly

Shell has reduced its share count by around 29% since 2021 — one of the most aggressive programmes in the sector. But UBS expects this to slow markedly.

The bank forecasts:

• Buybacks falling to $3 billion per quarter from Q4 2025
• A 14% quarter-on-quarter decline
• A payout ratio rising to 52%, before easing over time

UBS notes this shift could reduce the support that buybacks have provided to the share price.

Long-Term Output and LNG Challenges Ahead

UBS also flagged a medium-term concern about Shell’s ability to maintain production levels into the 2030s.

The firm warned of:

• A potential production gap of 500kboe/d by 2035 if Shell fails to replenish resources
• Around 700kboe/d of pre-FID projects identified, though some historically failed to meet return thresholds
• Pressure from lower expected LNG prices as new global liquefaction capacity comes online

UBS now expects LNG prices to fall from $13/mmBtu in 2025 to $11.5 in 2026 and $10.5 in 2027.

These factors led analysts to cut Shell’s earnings-per-share estimates by around 4% for 2026–2028.

Why UBS Still Sees Shell as a Defensive Play

Despite the downgrade, Shell remains the sector’s most defensive major, according to UBS, thanks to:

• A dividend breakeven oil price of $43 per barrel
• Net debt to capital of 21%
• A resilient cash-flow profile even in lower-price environments

However, the bank’s blended valuation method — combining a $75/bbl sum-of-the-parts model with a 6.0x EV/DACF multiple — resulted in a reduced price target of 3,000p.

Sources: (Investing.com, Reuters.com)