Analysts at Deutsche Bank have named BP PLC (LON:BP) as their ‘key buy’ in the European integrated oil sector, raising their target price for the FTSE 100-listed major and for its blue chip peer Royal Dutch Shell PLC (LON:RDSB) in a sector review.
In a note to clients, the German bank’s analysts said: “Three years on from the price collapse and the heavy lifting has been done.“
They noted that European oil companies will be able to cover dividends payments from free cash flow with crude prices at around US$50 a barrel in 2018.
READ: BP’s ‘solid’ first half welcomed by City investors
But, they added, the focus now switches to whether after three years of capital rationing investors can expect any income growth.
The analysts pointed out: “A dearth of new project decisions says post 2020 production growth must moderate. But equally push into the capex profiles and forward guidance now appears utterly unrealistic..”
They noted that the sector’s “capital intensity is collapsing, free cash flow is set to surge and with it corporate flexibility is returning.”
The analysts concluded: “Even allowing for a post 2025 decline in oil demand our cash analysis suggests at least 15%.”
They repeated a ‘buy’ rating on both BP and Shell, raising their target prices on each to 520p from 505p, and 2,450p from 2,400p respectively.
Among the European players, the analysts upgraded their rating and target price for Norway’s Statoil to ‘hold’ from ‘sell’, but downgraded their recommendation and target for Spain’s Repsol to ‘sell’ from ’hold’.