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Citigroup downgrades energy giants on crude pricing concerns

Citi has cut its stance on BP to 'neutral' and chopped its rating for Shell to 'sell' after scrutinising recent annual reports.

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Citigroup, the US bank, looked at 'big oil' players today

US broker Citigroup took the red pen to energy supermajors BP PLC and Royal Dutch Shell PLC on Wednesday on the back of continued concerns over the black stuff's price.

In a note to clients, Citi cut its stance on BP to 'neutral' and chopped its rating for Shell to 'sell' after scrutinising recent annual reports.

Citigroup’s analyst said: “Fine-print of 2016 annual reports indicates that most Big Oil companies still believe in 70-80s [dollar] oil prices longer term.”

They added: “This is not to say companies can’t manage at lower prices (as strategic updates all claim), but does suggest the sweet-spot of financial firepower – and therefore higher returns to shareholders – still requires significant price recovery.

“Further cost take-out looks needed to truly align these businesses to the 50-60s oil price cap that we think is set by US shale.”

Dividend concerns …

The analysts added: “A deepening of structural reforms is surely going to have to address the high cost of dividends that, for the most part, has not yet been reset.”

They added that, in their opinion, BP and Shell “have the biggest questions to answer.”

The analysts concluded: “We think management perseverance will prevent either from cutting dividends in 2017, but we think yields can still expand: RDS due to under-investment concerns and BP due to balance sheet concerns.”

Shares in both groups fell on the day.

Quick facts: Royal Dutch Shell Plc

Price: 2323 GBX

LSE:RDSB
Market: LSE
Market Cap: £184.64 billion
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