Citigroup upgrades Shell to 'buy'

Citigroup upgraded Royal Dutch Shell to ‘buy’ from ‘neutral’ with an unchanged price target of 1,775p, after the oil major got the green light from both sets of shareholders for its merger with BG Group.

“Our upgrade reflects a belief that the sharp erosion of equity value can be restored, driven by the delivery of strong growth over the 2016-18 frame that should act to boost return on equity and free cash flow,” the bank said.

It said BG makes Shell more competitive in changing energy markets, increasing exposure to short-cycle capital.

With an implied 35% of deal value being effectively written off through Shell’s underperformance, the market looks to be starting with low expectations, the bank said.

“On our estimates, post dividends, Royal Dutch Shell will run a $13-15 B cash shortfall in 2016. A 5-year credit default swap of around 125 basis points looks to reflect a debt-rating cut to single-A, a rating that we believe RDS will need to defend. We do not see an impending risk of a cut to dividends.”

At 1040 GMT, Shell’s B shares were down 4.2% to 1,437.71p.