Shell PLC (NYSE:SHEL) shares are trading higher Tuesday following an upgrade from Morgan Stanley. Martijn Rats upgraded Shell shares from Equal-Weight to Overweight and raised the price target from $66.50 to $79.80, reflecting a 20% potential upside.

Rats concluded that Shell's financial strength, combined with a favorable valuation, makes it well-positioned to weather ongoing challenges in the energy sector while delivering sustainable returns.

The analyst noted that while the energy sector sharply underperformed in the second half of 2024, much of the downside risk is now priced in. He explained that Shell's financial resilience and compelling valuation metrics supported the rating change. The analyst observed that Shell trades at 0.4 times the market's price-to-cash flow multiple and offers a dividend yield 1.7 times higher than the market average.

Rats also said that Shell's strong free cash flow outlook and lower risk of year-over-year distribution reductions set it apart from peers. Despite ongoing minor downward pressures on consensus earnings estimates for the sector, he said the earnings downgrade cycle is nearing completion.

The analyst also noted the mixed prospects for the oil and gas markets in 2025. While gas markets remain robust, oil markets appear well supplied, and downstream margins are likely to stay under pressure. Rats and his team noted that Shell's financial metrics position it to outperform in this challenging environment, especially compared to other major players in the sector.

SHEL Price Action: Shell shares were up 1.80% at $65.92 at the time of writing, according to Benzinga Pro.

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