HSBC reiterates ‘buy’ rating ahead of Royal Dutch Shell’s Q1 results

Analysts at HSBC reiterated their ‘buy’ rating for Royal Dutch Shell ahead of its first-quarter (Q1) results on Thursday 30 April, despite oil prices at record lows amid the Covid-19 crisis.

The lender did downgrade its target price for the stock to £15.45 per share in April, implying a potential upside of 7% for the oil and gas major based on Shell closing at £14.32 on Tuesday.

Share buybacks face resistance amid Covid-19

Shell is the largest purchaser of its own shares on the FTSE 100, with the company spending around £25 billion in share buybacks since 2010, with £10 billion of that total spent in 2019 – much to the delight of its shareholders.

However, since the Covid-19 outbreak lots of FTSE 100 companies have opted to cancel share buyback programmes and postpone dividend pay-outs to shareholders as a means of shoring up their balance sheets and mitigate the economic fallout from the pandemic.

‘Given the current macroeconomic conditions, we have announced a reduction in cash capital expenditure for 2020 to $20 billion or below from a planned level of around $25 billion,’ Shell said in its FY results in January.

Investors will be eager to see if Shell cancels its dividend in 2020 and opts to halt share buybacks, with the latter likely to weigh heavily on its share price.

‘Closer scrutiny of social issues may make it more difficult to continue with (or restart) distributions in line with prior practice,’ Victoria Kalb, a sustainability analyst at UBS, said in a recent note. ‘If distributions resume, we think dividends could be less controversial than buybacks.’

‘Pre-Covid, buybacks were already under scrutiny particularly in light of widespread issues around inequality,’ she added. ‘Given the significant social and societal issues raised by the crisis, companies could be under pressure to avoid restarting repurchases.’

Royal Dutch Shell: Technical analysis

Having broken below the bearish wedge of late March and early April, the price looks set for more declines, according to Chris Beauchamp, chief market analyst at IG.

Further losses below £12 would open the way to the March lows at £8.94. The price needs to rally back above the March gap down, which in this case would see the price clear £16.

This would also put it above the 50-day simple moving average (SMA) for the first time since the beginning of the year. There has been some sign of stabilisation above £12.50, with the price beginning to recover from its mid-month weakness.

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