Never mind the share price performances, the ‘Big Oil’ sector is rapidly seeing better cash generation and reducing debt burdens, says Morgan Stanley analyst, Martijn Rats.
In a note, he highlights that dividend increases in the sector - from Total and Statoil – represents an unexpected but important ‘inflection point’, reflecting the kind of progress seen by industry insiders.
“Every previous cycle has shown that, in the end, commodity prices and the industry's cost structure find a new equilibrium such that new projects can go ahead again and the majors can maintain their dividends,” the analyst said.
Nonetheless, Rats fancies rivals like Royal Dutch Shell PLC (LON:RDSB) and Total ahead of BP PLC (LON:BP) as the analyst has downgraded the London-listed oil major to ‘equal weight’ from ‘overweight’.
“We do not expect that BP will keep up with Total and, ultimately, Shell on dividend growth. It drops in our relative preference mostly because Total rises,” he added.
Shell is already rated as ‘overweight’ by Morgan Stanley and it could be the next oil major to increase its dividend, according to Rats, who thinks the bigger pay-out could come “this time next year”.
“Shell benefits from similar industrial fundamentals as Total: a cost base that is reset sharply lower, a healthy pipeline of projects that add cash flow, a strong Downstream segment and a growing Chemicals business,” the analyst said.
“On top, we would argue that Shell stands out with a particularly thoughtful approach to the Energy Transition.”
Statoil is upgraded to ‘equal weight’ following its dividend hike, as Morgan Stanley sees “impressive growth” and as a result the no longer warrants the previous ‘underweight’ rating.