Shell downgraded as RBC flags portfolio concerns and LNG headwinds

Shell PLC (LSE: SHEL, NYSE: SHEL) has been downgraded by RBC Capital Markets, with the broker pointing to growing worries about the long-term strength of Shell’s asset base, its exposure to international gas markets, and a tougher outlook for liquefied natural gas (LNG) trading margins. The note also highlighted continued strain in Shell’s chemicals business as restructuring efforts collide with difficult market conditions.

The downgrade matters because Shell is widely held by income and value-focused investors who have leaned on the company’s capital returns—especially buybacks—to drive per-share growth. RBC’s argument is not that Shell has “failed,” but that the easy wins from buybacks and tight spending may be fading, and the next phase of value creation will likely require clearer answers on durable growth, portfolio quality, and balance sheet flexibility in a changing macro environment.

What RBC changed: rating downgrade and a lower price target

RBC cut its rating on Shell to “sector perform” from “outperform” and lowered its price target to 3,200p from 3,300p. At the time referenced in the report, Shell shares were around 2,690p.

In plain terms, “sector perform” is a more cautious stance. It signals RBC expects Shell to perform broadly in line with sector peers rather than outperforming them. The target cut is also a signal that the broker sees less upside (or more risk) than before.

Shell’s strategy since Capital Markets Day 2023: discipline, returns, and a reset on renewables

RBC acknowledged that Shell has executed well against the strategy it outlined since its 2023 Capital Markets Day, where management emphasized capital discipline, shareholder distributions, and a stronger focus on the most profitable parts of the portfolio. In that period, Shell has also been viewed as de-emphasising certain renewables ambitions compared with earlier messaging.

Shell itself has communicated targets that tie directly to per-share improvement, including ambitions for free cash flow per share growth. For example, Shell has published investor materials discussing expectations for per-share free cash flow growth and the role of continued share count reduction.

That approach has resonated with many investors: keep spending controlled, prioritise returns, and use buybacks to lift per-share metrics. But RBC’s view is that markets are now asking for more than financial engineering—especially for energy majors that must demonstrate resilience across cycles.

Why buybacks became a cornerstone—and why RBC thinks the story is losing momentum

One of the headline points in RBC’s reasoning is the scale of Shell’s buybacks. RBC noted that buybacks have helped reduce Shell’s share count by more than 25% since the pandemic, supporting earnings-per-share momentum.

Buybacks can be powerful when a company generates strong cash flows and repurchases shares at reasonable valuations. They can:

• Increase earnings per share (fewer shares dividing the same earnings)
• Support dividends per share over time
• Signal confidence in cash generation

Shell’s own shareholder information explains that repurchased shares are generally intended to be cancelled, reducing issued share capital.

However, RBC’s concern is about what happens next. If a company’s valuation multiple stays flat, and if the market starts discounting long-term growth prospects, buybacks alone may not be enough to drive sustained re-rating. RBC highlighted that Shell’s valuation multiple has remained stagnant even after significant capital returns, which raises questions about what the market is “missing” or still worrying about.

The key issue RBC raised: portfolio longevity and the “next chapter” problem

RBC’s phrase “portfolio longevity” is essentially about how long Shell’s current asset base can keep producing attractive cash flows without forcing the company into difficult trade-offs—like taking bigger risks, overpaying for acquisitions, or stretching the balance sheet.

For an integrated energy company, portfolio longevity includes:

• Upstream (oil and gas production) replacement and decline rates
• Integrated Gas / LNG contract positioning, project pipeline, and trading performance
• Downstream (refining, marketing) profitability through cycles
• Chemicals competitiveness versus global peers (especially given European energy costs)
• Transition exposure—how policy, demand shifts, and carbon constraints affect long-term returns

RBC’s argument is that the market environment has shifted. Investors may be placing more weight on “what’s the durable growth engine?” rather than simply “how much cash can be returned this year?”

LNG trading headwinds: why “international gas + trading” is a double exposure

Shell is one of the world’s biggest LNG players, and LNG is central to its strategy. Shell has publicly discussed growth ambitions in LNG, including targets for LNG sales growth and expectations for long-term demand, particularly in Asia.

But RBC warned that there are headwinds across international gas and trading—two areas where Shell has meaningful exposure.

To understand that concern, it helps to break LNG into two profit pools:

1) The “asset” side: projects, volumes, and contracts

Long-life LNG projects can generate strong returns when they secure reliable feedgas, operate efficiently, and sell into markets with supportive pricing. But LNG is also capital intensive, and project cycles are long—meaning timing, costs, and demand forecasts really matter.

2) The “trading” side: buying, selling, optimising cargoes

LNG trading margins can be attractive when regional price differences are wide and volatility creates optimisation opportunities. But when markets are more balanced—or when volatility doesn’t translate into profitable spreads—trading margins can compress. RBC’s note pointed to a tougher outlook for LNG trading margins as part of its downgrade rationale.

In other words: even if long-term LNG demand is expected to grow, the near-to-medium-term earnings contribution from trading can face periods of weaker profitability, which may weigh on sentiment.

M&A ambitions vs. valuation reality: why a stagnant multiple can limit flexibility

RBC raised a practical question: if Shell’s valuation multiple does not improve, then large acquisitions could become harder to execute without relying more heavily on issuing shares (equity) or taking on additional leverage. RBC suggested this dynamic creates a challenge for Shell’s M&A ambitions.

This matters because acquisitions in energy can be:

• Defensive (replacing declining production or securing supply)
• Strategic (building LNG scale, new regions, or new capabilities)
• Opportunistic (buying assets cheaply in down cycles)

But to do “good” M&A, a company usually needs either:

• a strong stock currency (so share-based deals are less dilutive), or
• plenty of balance sheet room (so debt-funded deals don’t threaten credit metrics).

RBC’s point is that if investors remain skeptical about the portfolio’s long-term strength, Shell may continue to trade at a discount to peers, which can reduce strategic flexibility.

Chemicals restructuring pressure: “running uphill” in a tough market

RBC also highlighted pressure in Shell’s chemicals restructuring, describing the effort as “running uphill” amid difficult market conditions.

That comment aligns with broader challenges across the European chemicals landscape: high energy costs, softer demand in some end markets, and intense global competition. Recent reporting and company communications have pointed to weak or pressured chemicals profitability in the region.

Shell has previously indicated intentions to review, sell, or reshape parts of its chemicals footprint, particularly in Europe, and explore partnership options in the US—showing that chemicals is a known area of strategic focus.

For investors, chemicals matters because it can swing from a strong cash generator in good cycles to a drag when margins compress. If restructuring takes longer or costs more than expected, it can weigh on the “clean simplicity” of the investment case.

So what does this mean for investors watching Shell right now?

RBC’s downgrade doesn’t automatically mean Shell is a “bad” company or that shareholder returns stop. Instead, it signals that one major bank believes the risk/reward balance is less compelling than it was, given:

• Questions about how long the current portfolio can deliver strong cash flows without major changes
• Headwinds in international gas and LNG trading
• A chemicals segment facing restructuring difficulty
• A valuation that hasn’t re-rated despite heavy buybacks

At the same time, Shell continues to position itself around disciplined spending and per-share cash flow growth, and it has maintained a strong focus on shareholder distributions. Shell has previously announced plans to distribute a significant portion of operating cash flow, primarily via buybacks, while keeping investment spending controlled.

That sets up a clear debate:

• Bull case: Shell’s scale, disciplined capital allocation, and LNG leadership keep cash flows strong; buybacks and dividends continue to compound value.
• Bear case (closer to RBC’s caution): Without clearer long-term growth and portfolio durability, the market may keep Shell on a lower multiple; buybacks become less impactful; chemicals and LNG trading volatility create earnings headwinds.

What to watch next: near-term signals that could change sentiment

If you’re tracking Shell after this downgrade, here are practical indicators that can shape the narrative over the next few quarters:

1) Updates on LNG trading and Integrated Gas performance

Watch for commentary about LNG trading conditions, volatility, and realised margins. Even small shifts in tone can change expectations in this profit pool.

2) Chemicals results and restructuring milestones

Progress on asset reviews, partnerships, closures, or cost improvement can help investors judge whether chemicals becomes a smaller issue—or a longer-running drag.

3) Capital allocation balance

How Shell splits cash between buybacks, dividends, capex, and debt reduction will be closely watched, especially if commodity prices move.

4) Evidence of “portfolio longevity” improvements

This could come from project sanctioning discipline, improved returns, lower breakevens, or targeted deals that strengthen the portfolio without stressing the balance sheet.

Background reading (official source)

For readers who want to see Shell’s own strategic framing, its Capital Markets Day materials and investor updates are available on the company’s website here: Shell Capital Markets Day 2023 (Investor Presentations).

Conclusion: a reminder that “execution” and “market confidence” are different things

RBC’s downgrade underlines a simple reality of big-cap energy investing: a company can execute well on capital returns and still struggle to win a higher valuation if investors are uneasy about the long-term story. In Shell’s case, RBC is pointing to portfolio longevity, LNG trading headwinds, and chemicals restructuring pressure as reasons the market may remain cautious—at least for now.

For Shell, the challenge is to keep doing what it’s been doing well—discipline and distributions—while also convincing investors that the portfolio can thrive for the long haul, not just the next quarter. If Shell can deliver clearer proof on durability and growth, sentiment can change quickly. If not, RBC’s view suggests the stock could continue to trade at a discount even as cash returns remain strong.

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