HSBC Downgrades Shell to Hold, Warns of Rising Debt and Valuation Misalignment.

HSBC downgraded Shell to Hold from Buy with a price target of 2,950 GBp, citing "normalization" in liquified natural gas and oil trading weighing on profits more than peers. The firm also expects Shell's net debt to rise by almost 50% to $60B in the next few years due to unfunded distributions until the end of the decade. HSBC believes Shell's valuation premium versus Total is no longer justified.

HSBC has downgraded Shell (SHEL) to "Hold" from "Buy," citing concerns over profit normalization in the liquified natural gas and oil markets, as well as a significant increase in net debt. The investment bank has set a price target of 2,950 GBp, a slight increase from the previous target of 2,900 GBp [1].

The downgrade is primarily driven by HSBC's expectation that Shell's net debt will rise by nearly 50% to $60 billion over the next few years. This increase is due to unfunded distributions until the end of the decade, which are not being covered organically [1]. Additionally, the firm believes that Shell's valuation premium over TotalEnergies (TTEF) is no longer justified, given the similar funding gaps and debt trajectories of both companies [2].

HSBC's analysis also points to weakening trading profits, particularly in Shell's Integrated Gas segment, as energy markets normalize. The company's earnings from trading make up an estimated 25% of post-tax income, compared to 20% at BP (BP) and 10–15% at TotalEnergies [2]. The firm forecasts a return on average capital employed (ROACE) contribution from trading of around 2%, at the bottom of Shell's 2-4% guidance range and in line with the 10-year average [2].

Shell's net income and cash flow estimates for 2025-2027 have been revised downward by 4% and 5%, respectively, reflecting weaker trading and deeper losses in Chemicals, only partly offset by stronger performance in Upstream and Marketing [2]. The firm's 2026 earnings and operating cash flow forecasts now stand 5% below Bloomberg consensus, with EPS estimates lowered to $2.98 in 2025 and $3.16 in 2026 [2].

HSBC maintains its $3.5 billion quarterly buyback for Q3, but the projected payout ratio is expected to rise to 51-52% over 2025-2027, breaching Shell's stated 40-50% range [2]. The firm also noted that lease payments, revised to $5 billion annually, reduce Shell's 2026 free cash flow yield to 6.3%, creating a funding gap of over $9 billion, or 4% of market capitalization [2].

References:
[1] https://www.tipranks.com/news/the-fly/shell-downgraded-to-hold-from-buy-at-hsbc-thefly-2
[2] https://www.investing.com/news/stock-market-news/hsbc-downgrades-shell-to-hold-on-debt-concerns-fading-trading-profits-4167412