“Sharp commodity declines combined with a challenging downstream means the strong earnings and cash momentum apparent for much of the past two years should end this quarter,” said analyst Lucas Herrmann.
Ahead of the upcoming reporting season - BP and Shell have trading updates due in the next two weeks before releasing financial results in the spring - the analyst added: “As ever, at times of intense price moves and volatile differentials the risks around forecasting look set to intensify.
“Results should show good year-on-year progress with headline cash flow strongly supported by the material release of working capital, helpful for balance sheets.”
Deutsche rates BP as a ‘buy’ with a 590p price target, suggesting some 15% upside to the current price.
“We continue to feel greatest 12-month conviction in BP (Buy 590p) but would equally emphasize that sector valuations in general are not, in our opinion, demanding at this seemingly late stage in the equity market cycle,” Herrmann added.
Specifically, with BP, the German bank believes that the market valuation continues to “understate the visibility of its growth and balance in its portfolio.”
Elsewhere, however, Herrmann said: “Gas price lag may support those with a bias - ENI ‘Hold’ with a €17 target, Shell ‘Hold’ 2650p target.
“The scope for material working capital and derivative cash release at Shell may also calm emerging nerves on a seeming lack of 2019 flexibility.”