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Piper Sandler on Thursday revised its financial outlook for Shell, Inc. (NYSE:LON:) and raised its price target from $75 to $76 while maintaining an “overweight” rating on the stock. The company's analysis highlights contrasting downstream performance in Europe and the United States, particularly following Q4 2023 results.
The European downstream business, which involves refining and marketing petroleum products, has significantly underperformed compared to its U.S. peers. For example, in the fourth quarter of 2023, companies such as Shell, BP (NYSE:), and Total Energies (EPA:) (TTE) underperformed significantly, with downstream net income accounting for just 2% of total company profits. It wasn't too much.This includes ExxonMobil (NYSE:) and chevron (NYSE:), the downstream segment accounts for 36% and 18% of total company revenue, respectively.
This trend is not limited to a single quarter; a look back at average incomes from 2021 to 2023 reveals widening inequality. For U.S. companies such as ExxonMobil and Chevron, downstream accounts for 31% and 20% of profits, compared to 10% to 15% for European companies such as Total Energy, Shell and BP. .
Piper Sandler expects refining profits will likely remain above mid-cycle levels for an extended period of time. The forecast is based on the expectation that European downstream portfolios may continue to shrink, which could provide a relative tailwind for U.S. oil companies.
Piper Sandler's price target is derived from a balanced approach that considers a 50/50 free cash flow (FCF) yield target and a 50/50 target EBITDA multiple for fiscal year 2024.
The FCF yield target is based on a long-term oil price assumption of $80 per barrel, down from the previous assumption of $90. The EBITDA multiple target is set at 4.75x, which includes a 1.75x discount compared to ExxonMobil's multiple.
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