MS, Citi Bullish on Big Oil, but Differ on Shell
Citigroup says integrated oil companies (IOCs) should not be judged only on their improving shareholder returns, but also by their "deconstructed synthetics."
- Says the intrinsic value of IOC upstream businesses is currently at 5.3x 2020E EV/debt-adjusted cash flow vs traditional U.S. E&P companies trading at 5.7x.
- Upgrades BP and Repsol to "buy", joining Chevron (CVX), Exxon and ConocoPhillips (COP).
- Cuts Statoil (STO) to "sell" to join Shell, saying ratings reflect concerns over portfolio-shortfall that are not factored into valuation.
- Morgan Stanley's says its analysis shows the 'Big 5' could generate ~$17 bln FCF in Q1, highest level in seven years.
- Yet, MS notes, the sector has not outperformed as investor sentiment stays low and European majors seen as a "show-me" story, as far as FCF growth is concerned, after a weak Q4.
- MS says weak cash generation in Q4, especially vs. Q2 and Q3, resulted in sector's underperformance, particularly Shell's; but expects "the reverse will happen" post Q1 2018.
- MS rates Shell and Total "overweight" are both are among its top picks.
- But, Citi also cautions that while rising FCF may translate into higher shareholder returns, investors should note the industry is probably operating under sustainably low capex.
Reporting by Jasmine I S
