On Thursday, Piper Sandler adjusted its financial outlook for Shell (LON:RDSa) Plc (NYSE:LON:SHEL), raising the price target to $76 from $75, while maintaining an Overweight rating on the company's stock. The firm's analysis highlighted the contrasting performance between European and U.S. downstream segments, particularly following the fourth quarter results of 2023.
European downstream operations, which include refining and selling of petroleum products, have shown significant underperformance compared to their U.S. counterparts. For instance, during the fourth quarter of 2023, companies like Shell, BP (NYSE:BP), and TotalEnergies (EPA:TTEF) (TTE) experienced notably weak results, with downstream net income representing a mere 2% of their total corporate income. This is in stark contrast to U.S. oil giants like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), where downstream segments accounted for 36% and 18% of total corporate income, respectively.
The trend is not limited to a single quarter, as a review of the average income from 2021 to 2023 reveals a widening gap. U.S. companies like ExxonMobil and Chevron had downstream segments contributing 31% and 20% to their income, whereas European firms like TotalEnergies, Shell, and BP ranged between 10% to 15%.
Piper Sandler anticipates that refining earnings are likely to stay above the mid-cycle levels for an extended period. This forecast is based on the expectation that European downstream portfolios may continue to shrink, which could provide relative tailwinds for U.S. oil companies.
The price target set by Piper Sandler is derived from a balanced approach, taking into account a 50/50 weighting between a free cash flow (FCF) yield target relative to the FTSE 100 and a target fiscal year 2024 EBITDA multiple.
The FCF yield target is based on the long-term oil price assumption of $80 per barrel of Brent crude, a decrease from the previous $90 estimate. The EBITDA multiple target is set at 4.75 times, which includes a 1.75 times discount compared to ExxonMobil's multiple.
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