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(Sharecast News) - Royal Dutch Shell has overtaken BP as the "top pick" in the sector for Barclays, which feels the oil giant still needs to improve free cash flow growth to boost shareholders returns.
Better cash returns for shareholders, "almost regardless of the oil price", would make Shell a true world-class investment case on a multi-year basis, the bank's analysts said.
On their estimates, the combination of FCF in both integrated gas and the downstream business alone could reach $25bn per year by 2025, far in excess of the near-$15bn annual dividend requirement.
This would also increase the likelihood that a $10bn per year share buyback scheme could continue well into the next decade, which the analysts said would be "going a long way" to offsetting the dilution associated with the BG deal and scrip dividend programme.
"There continues to be debate in the market about the group's level of spending, but for this period in the company's life-cycle we see it as appropriate, if not a little too high."
The share price, with a near-6% dividend yield and a further 3% of market cap set to be returned through share buybacks each year, "simply does not reflect the underlying free cashflow potential" and offers "a clear value opportunity", with the capital markets day in June a potential key catalyst.
Shell's 3,250p share price target remained unchanged, while BP was also continued with an 'overweight' rating.
Elsewhere, analysts at JP Morgan reiterated their 'overweight' stance on both firms, telling clients that the 'cash cow' phase was now in "full swing", while pointing to continued deleveraging in the sector and the potential for further declines in cash 'breakeven' levels at the latter.
Also at JPMorgan Cazenove, analysts downgraded their rating on Petrofac after a former employee pleaded guilty to bribery in a larger than expected amount of recent contracts wins.
Last week, David Lufkin, former global sales chief, pleaded guilty to eleven counts of bribery as part of the Serious Fraud Office's ongoing investigation into the company. The SFO said the charges related to the making of corrupt offers to influence the award of contracts to Petrofac worth in excess of $3.5bn dollars in Saudi Arabia and $730m in Iraq between 2012 and 2015.
JPM Cazenove recognised that "there is a value case to be argued" with the shares trading for just around five times forward earnings and with a dividend yield of around 7.5%, with no charges been brought against the company "and that PFC's stance against the investigation can yet be proven correct".
However, the analysts downgraded to a 'neutral' stance from 'overweight' due to the "risk of further escalation" and "a need again for reassurance that PFC's competitive position is not diminished".
After this SFO development, the analysts felt Petrofac, as it did after the SFO probe initially emerged in 2017, "needs to show that customer confidence remains".
As such, they have "less confidence in the outlook" and cut the target price 24% to 500p, though remain reassured that the backlog provides backing for the current value and the balance sheet is getting stronger.
To watch at the company's participation on the Marjan project, in Saudi Arabia, and any further developments in the SFO case.
Over at Berenberg, analysts upgraded British challenger bank Metro Bank to 'hold' from their previous 'sell' rating on Monday but noted that near-term risks to the downside still persisted.
Berenberg, which slashed its target price on the firm by more than half, said Metro's mandate to prioritise growth over near-term returns had been eroded, with the bank now trading at roughly 1.0x tangible book value versus the more than 3.0x it traded at in 2018.
However, with the German bank stating that near-term growth at Metro would likely be reliant on external capital, its analysts believe that Metro's return expectations had to be re-based in order to "re-establish confidence".
Berenberg also said Metro's unexpected level off risk-weighted assets created a "capital conundrum".
While there have been calls for the bank to pause growth and avoid costly new capital, Berenberg said: "not growing is not an option".
"Without growth, Metro would arguably continue to generate just £50m of earnings pa which, even on a 10-15x multiple, implies c40-60% downside to the current share price," said analyst Peter Richardson.
Richardson also noted that Metro's value relied on its ability to meet long-dated targets, something for which investor confidence was "paramount".
All in all, Berenberg said: "The reduction to our price target reflects greater dilution from addition near-term capital and a lower issuance price for future capital."
"Our FY 2018 EPS estimates fall 26%, reflecting disappointing Q4 2018 growth. Our estimates from FY 2019 are also affected by £150m of capital that we believe may be required during FY 2019."
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