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Royal Dutch Shell should be preferred over BP, says Deutsche Bank

Analyst Lucas Hermann said the risk-reward ratio is already favourable for Shell.
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DB set a price target of £24.50 a share

An influential City oil team favours Royal Dutch Shell Plc (LON:RDSA) above BP Plc (LON:BP) in the hunt for value among the majors.

Number-one rated Deutsche Bank says the decision by the major producing nations to rein back output only strengthens the ‘buy’ case for the Anglo-Dutch giant.

It set a price target of £24.50 a share and is a fan of the 6% dividend yield.

Analyst Lucas Hermann said the risk-reward ratio is already favourable, adding he is heartened at the way the company’s disposal programme is going.

“Given the depth and quality of the Shell resource base the questions has never really been the potential for tomorrow’s portfolio; rather the extent to which legacy might hold it back,” the Deutsche number cruncher said in a note to clients.

“With a greater dependence on the macro than peer both to balance its cash flows and heal an ailing balance sheet, OPEC support for commodity pricing can, in our opinion, only aid the investment case. Sure there is much to be done both to slim down and to repair.”

BP, by contrast, is weighed down by the continued financial fall-out from the Deepwater Horizon disaster, referred to by the City as Macondo.

Restating his ‘hold’ advice and 506p target price, Hermann said: “Where the portfolio feels more robust, ongoing large Macondo payments continue to eat into cash flow.

“Transient perhaps but until we see their moderation concerns on the BP cash cycle look set to remain.”

The Square Mile is split on the outlook for BP. Of the 15 analysts logged as following the stock, nine are ‘buyers’. The remainder are in Deutsche’s camp as holding ‘neutral’ recommendations.

For Shell, the picture is markedly different. Ten out of 12 analysts are positive on the shares, while one is a ‘sell’ and another ‘neutral’.

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