Market News

Morgan Stanley downgrades BP, cuts target for Shell

13/02/2018 15:01

(ShareCast News) - Morgan Stanley downgraded its view on shares of BP by one notch from 'overweight' to 'equalweight', predicting that management would continue to prioritise debt reduction over the dividend payout. Elsewhere in the sector on the other hand, Total and Statoil had rocked the proverbial boat with their recently announced dividend hikes. Indeed, it was chiefly due to the above that the broker downgraded BP, as it was limited to two 'overweights' in the sector. Thus, while the broker's recommendation on Royal Dutch Shell stayed at 'overweight', that on Total was increased from 'equalweight' to 'overweight'. The decisions from Total and Statoil marked an 'inflection point' for the sector, Morgan Stanley said, adding that it was "reflective of the improvement that insiders were seeing". Yet while Total's dividend cover-by-free cash flow was seen reaching a "particularly strong" 155% by 2019, in BP's case that ratio was only expected to improve to around 95% in 2018 and then 110% in 2019. Combined with a less robust balance sheet, that would see management prioritise debt reduction, Morgan Stanley said. Even so, as confidence grew in its payout, Morgan Stanley expected the shares' dividend yield to fall. Worth noting, the broker also revised its target prices for all three stocks lower, with BP's falling from 645p to 550p, Total's from €56.0 to €55.6 and Shell's from 3,040p to 2,830p. The target price cut on Shell was despite the broker's forecasts calling for it to be the next to raise its dividend, with its free cash flow reaching $21bn in 2018 on an oil price of $64 a barrel, rising to $24bn in 2020 at $60 oil, resulting in FCF dividend covers of about 135% and 155% in each of those years.

"If history is any guide, BP's financial outlook is strong enough so that investors do not demand a yield much bigger than ~5.2% [from 6.2% at present], which is our target yield by end-2018.

This still suggests a return prospect of ~23% - healthy but less strong that its two direct peers (Total and Shell)."

It is important to remember that the value of investments can go down as well as up and it is possible to get back less than you invested, especially in the early years. Past performance is no guarantee of future returns and interest rates and dividends are variable and cannot be guaranteed in the future. Any tax treatment mentioned is based on personal circumstances and current legislation which is subject to change. In the event of a client having a complaint about our services we will do our best to resolve that complaint promptly and to the client's satisfaction. However if we are unable to do so, the client may have the right to complain to the Financial Ombudsman Service. Further information can be found on the Financial Ombudsman Services's Website at