ANALYSTS at Brewin Dolphin have looked at why BP has outperformed rival Royal Dutch Shell of late and whether that trend is likely to continue.
On BP, given the dividend is a key priority for management, a research note looks at what level of oil price the pay-out could be at risk.
“We said in January that BP’s dividend was safe at a $60 long-term Brent price. Since then, BP has said that it will attempt to run the company based on a long-term price of $50,” said the note.
But the research note said it will take time for BP to set the company to the new strategy and in the meantime it said it would be “vulnerable” if oil prices were around that level.
Turning to Shell, analysts look at the planned BG takeover deal and whether there were any barriers to completion: “There are several regulatory hurdles to cross. The most important being in Kazakhstan, Brazil and China,” they pointed out.
But they added that they did not expect disposals to be able to pass regulatory hurdles.
“Shell said that the deal would make economic sense at a long-term average Brent price of around $80 per barrel based on the assumptions of synergies and capex cuts. While this is clearly above the futures price in 2016/17, we have argued that Shell has understated the potential benefits of the deal,” said the note.
Brewin Dolphin has previously argued that Shell would still be able to pay its dividend at a long-term oil price of $60 per barrel. Since then it has significantly reduced its capex assumptions, as has BG Group.
Although they believe the additional gearing involved in the deal would stretch the balance sheet if the oil price remained around $50 per barrel, the improvement in cash flow from BG Group would mostly offset this concern.
The analysts argue that the under-performance of Shell versus BP is unjustified on fundamentals. Although it said there were risks to Shell from the BG deal, it believes BP is more vulnerable than Shell to an extended period of lower oil prices given its need to rebuild production and reserves.
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