Cash flow is King, SocGen says, upgrades Shell to Buy

Analysts at Societe General upgraded their recommendation on shares of Royal Dutch Shell, telling clients they expected the stock's underperformance and oil price weakness over the past three months to go into reverse in the backhalf of 2017.

"This is an opportunity to buy Shell's rapid transformation into a world class investment case," they said, lifting their recommendation on the shares from 'Hold' to 'Buy'.

In particular, they highlighted the outfit's cash generation during the first three months of the year - which was the highest among its peers.

Shell's annualised free cashflow already more than covers its dividend cost and $25bn of a planned $30bn asset disposal programme is already underway.

"Annualised, the 1Q organic free cash flow with Brent at $54 per barrel is already at the targeted 2020 level - and the process is clearly in the early stages."

Together with group operating expenditures well under $40bn, the company has in effect delivered on all its metrics as promised at the time of the BG acquisition.

The policy of targeted asset disposals are simplifying the portfolio, lowering costs and raising resilience and efficiency, the analysts explained.

For SocGen, that deserves a strong re-rating in the shares' valuation.

Despite its premium organic free cash flow, trading at 6.55 times its estimated EV/DACF multiple its valuation is "undemanding" and below that of peers Total and BP - albeit in-line with the sector average.

SocGen had a 2,500p target price on the shares.

Over at RBC, analysts were of a similar view, telling clients: "The market remains skeptical about Shell’s $30bn divestment plan as well as its ability to cover its dividend at lower oil prices. With the dividend covered organically for three consecutive quarters, and good visibility on two-thirds of the asset sales programme, we think these concerns are overdone. We see the shares as materially undervalued, and reiterate our Outperform recommendation."

RBC had a 2,600p target price on Shell's B shares.