UBS Group AG raises Shell (SHEL.US) Q2 profit forecast by 18% to $9.1 billion, but long-term concerns remain, neutral rating given.

UBS Group AG recently released a Shell (SHEL.US) 2Q26 performance outlook trading update report, giving Shell a "neutral" investment rating for the next 12 months with a target price of 3180 pence. The strong second quarter Shell business performance guidance significantly exceeded market expectations, which is the core reason for the significant upward revision of profit forecasts. UBS Group AG raised Shell's 2Q26 net profit by 18% to $9.1 billion, operating cash flow excluding working capital increased by 29% to $192 billion, 26% higher than the market consensus. The cash flow improvement was mainly due to a $1.5 billion inflow of derivative funds and a $3.5 billion release of operating capital, which reduced the company's net debt by about $11 billion compared to the previous quarter, continuously optimizing the leverage ratio. In terms of business segments, the chemicals and downstream products business contributed the largest increase in performance, benefiting from higher-than-expected liquid trading income, leading to a 46% increase in profit forecasts for the segment to $2.8 billion; the integrated natural gas segment performance improved significantly compared to the previous quarter, offsetting the loss from the Pearl GTL plant shutdown, with a 14% profit increase to $2 billion, but it still fell below market consensus; upstream production guidance was revised upwards, with a 5% increase in profit to $3.5 billion; marketing sector sales fell below expectations, with a slight profit decrease to $1.4 billion; renewable energy sector had a small profit contribution and limited impact on overall performance. Different business lines showed varied performance: integrated natural gas was affected by Qatar's production capacity, with a production range of 610-650 thousand barrels of oil equivalent per day, LNG sales slightly exceeded expectations; overall upstream production guidance was raised to 1,750-1,850 thousand barrels of oil equivalent per day, supporting the recovery of upstream profits; refining units operated close to full capacity, with marginal profitability slightly higher than UBS Group AG's original estimates. In the medium to long term, UBS Group AG provided a complete financial forecast for 2026-2030, pointing out that 2026 will be the peak year in terms of profit, with adjusted net profit reaching $28.488 billion. The company will continue to maintain stable capital expenditures, with funds used for traditional oil and gas capacity expansion and steady increase in crude oil and natural gas production, as well as investment in low-carbon transition businesses such as renewable energy generation, hydrogen energy, carbon capture, and sustainable fuels. On the shareholder return side, Shell's dividends are steadily increasing, with an expected dividend per share of $1.77 in 2030, maintaining a long-term payout ratio range of 31%-39%. The annual stock repurchase program is set at a fixed $12 billion, with an overall conservative return strategy and no plans to increase it. The number of outstanding shares will decrease annually due to continued buybacks, and the balance sheet remains robust, with a leverage ratio of 19.7% in 2026, showing a slight long-term increase but manageable risks. From an investment perspective, UBS Group AG maintains a neutral rating, estimating a potential 9% increase in the stock price over the next 12 months, with a total expected return of 13.3% including dividends, providing limited excess returns. The report highlights core risks such as significant fluctuations in oil and natural gas prices, cyclical downturns in refining and chemical product profit margins, and inherent exploration and production risks for the oil and gas industry. In conclusion, Shell's short-term performance in the second quarter is well supported, but long-term profitability is expected to gradually decline, with continuous capital investment and limited upside valuation potential. Therefore, UBS Group AG maintains a neutral investment view.