By Alexander Bueso
Date: Thursday 20 Apr 2017
(ShareCast News) - Cannacord Genuity sounded a cautious note on shares of Royal Dutch Shell's B shares pointing out the company's lack of free cash flow and mounting debt pile given its current dividend payouts, telling clients it preferred BP instead.
Analyst Alex Brooks expected the oil major to post a bumper set of first quarter financials.
However, Shell's earnings were seen falling short of its declared dividend for a seventh straight quarter and at the current oil price of $55 a barrel a sustained lift in profits above its divi payout was not on the cards in the foreseable future, he said.
Indeed, in the same research note the broker also said it was lowering its oil price forecast for 2017 from $60 a barrel to $55.
So, "despite protestations from management to the contrary" the payout was likely to come back into focus over the course of 2017.
A combination of hardly any free cash flow over the past decade, high levels of debt and asset disposals at an "unattractive" point in the cycle mean its shares are at the greatest risk of further downward pressure, Brooks said.
The analysts cut his target on the stock from 2,050p to 1,900p and reiterated a 'Sell' recommendation.
BP on the other hand was furthest along in its restructuring process and with the residual Macondo liability set to be gradually settled free cash flow was likely to improve "substantially".
Hence, Brooks said he favoured shares in BP over those in Shell or Total, leading him to reiterate a 'Buy' recommendation and 525p target on the shares of the former.
As of 15:48 GMT shares of Shell BP were down 0.22% at 2,000p.
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