A fortress company: why banks see Shell as a defensive asset in the oil market

The year 2025 can hardly be called a calm year for the oil market - the increase in OPEC+ production since the spring of this year has become one of the factors putting pressure on prices. Since April, the member countries of the association have been accelerating their production quotas compared to the plan approved in December 2024. As early as September 2025, they will finally lift production limits of 2.2 million barrels per day. The mood at the July OPEC meeting in Vienna was described by one of its participants in a conversation with the FT as similar to "the mood of sailors before the storm".

There could be a surplus of oil on the market as early as this winter. French oil giant Total Energies has warned that oil will soon be "in surplus", especially if the global economy slows down, the FT wrote. The International Energy Agency in August raised its forecast for global oil supply in 2025 from 2.1 million to 2.5 million bpd. At the same time, it once again lowered the forecast of global demand for oil and now believes that it will increase by 680 thousand barrels per day this year. Since the beginning of the year, the IEA has already lowered the demand forecast by 350 thousand barrels per day.

Other important market concerns include the war between Israel and Iran, US duties and news of slowing oil demand in China. They also include US threats to impose new sanctions: US President Donald Trump had previously threatened new restrictions on Russia and Russian oil buyers, but after the Anchorage summit he said that no new sanctions were needed for the time being. To date, the United States has imposed additional import duties of 25% for the purchase of Russian oil only India. India and China are the largest buyers of oil from Russia.

Brent crude oil prices have fallen more than 9% since the beginning of the year, to $67.7 per barrel. The SPDR S&P Oil & Gas Exploration & Production ETF has gained 1.65% since the beginning of the year, according to data as of the close of trading on August 28.

Which oil companies would look more resilient in such a market?

In August, a team of UBS analysts wrote that they considered Shell shares to be the best defensive asset in the sector amid uncertainty. Barclays also wrote about attractiveness of Shell in its report dated July 31. Morgan Stanley on July 31 named Shell one of its key investment ideas in the sector, the bank keeps the stock on its "Top Pick" list with an "above market" rating and a target price of 28.6 pounds, up 5.34% from the closing price on August 28.

According to Bloomberg, among the five largest oil and gas companies in the world by capitalization, Shell (in addition to it, the list includes ExxonMobil, Saudi Aramco, Chevron and PetroChina) has the highest share of "buy" ratings. A total of 27 analysts give recommendations on the company, of which 18, or 67%, recommend to buy its securities, and the remaining nine - to hold. Although ExxonMobil and Saudi Aramco have higher growth potential, they have a lower proportion of "buy" ratings - 60% and 59%, respectively. The average target price for Shell shares is 29.88 pounds, suggesting a 10% upside from the closing price on August 28.

UBS in their August 1 report maintained a "buy" recommendation for Shell securities and raised their target price from £29.5 to £30, up 10.5% from the closing price on August 28.

Shell reported its second quarter results on July 31. Its revenue declined by 12.2% to $65.4 bln against market expectations of $58.3 bln, adjusted net profit fell by 32% to $4.3 bln year-on-year, but significantly exceeded analysts' forecasts ($3.74 bln).

UBS notes that Shell beat market expectations for operating cash flow for the sixth consecutive quarter thanks to strong profitability in upstream and marketing (this segment includes gas station chains and oil sales). The company's costs decreased by 4% quarter-on-quarter, with more than 60% of the savings coming from permanent changes in process organization rather than one-off measures. These included reducing bureaucracy and introducing new technologies to reduce production and logistics costs. This focus on cost reduction makes the company one of the best defensive assets in an uncertain energy market, UBS analysts wrote.

Barclays called Shell's second-quarter reporting a "return to solid footing." In its July 31 report, the investment bank maintained an "above market" rating and a target price of £40, up 47.3% from the closing price on August 28.

According to the investment bank's calculations, since 2022, the company has already managed to save $3.9 billion out of the $5-7 billion of expenses it planned to cut by 2028. The savings are due to the optimization of processes within the company, as well as the sale of non-core assets, such as a plant in Singapore and a 30% stake in an oil production subsidiary in Nigeria.

Barclays calls the start of liquefied gas deliveries from the LNG Canada project in July a key event for the company this year. Shell holds a 40% stake in the project. Now one shipment leaves there every eight days, and at peak capacity it can leave every four days. The company plans to grow gas sales by 4-5% a year through 2030.

Barclays has raised its earnings per share forecasts for Shell - it expects earnings of $3.35 per share in 2025 and $5.05 by 2027, up from $2.56 in 2024. The investment bank's materials say that Shell plans to return almost half of its cash flow - 40-50% - to shareholders in the form of dividends and share buybacks.

Morgan Stanley, in turn, notes three positive points for Shell investors: the company's resilience to market shocks, proven ability to make qualitative changes and a large-scale dividend program.

The bank's analysts emphasize that Shell remains one of the few major players combining strong profitability with a diversified portfolio of assets, from its conventional oil business to deepwater projects in Brazil and Nigeria.

According to analysts of Canadian bank RBC Capital Markets, Shell is a "fortress" among competitors - the most stable company in the sector. In its July 31 report, RBC maintained an "above market" recommendation on Shell shares and a target price of 34 pounds, which implies an upside of 25.2% from the closing price on August 28. The bank puts into its model that Shell will conduct a $14 billion buyback of its shares in 2026. If the company's stock price remains under pressure, an accelerated reduction in the number of shares on the market could be a catalyst for future dividend growth, the RBC analysts wrote.

This article was AI-translated and verified by a human editor