Shell becomes Barclays 'top pick' in energy sector
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.
FTSE 100
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FTSE 350
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FTSE All-Share
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Oil & Gas Producers
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Shell 'B'
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17:05 28/01/22
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.