Exane BNP cuts targets on BG Group, BP and Royal Dutch

Deflation in the oil sector as a result of the decline in the price of crude oil means that operating costs for the European oil majors will be 30% less over the next two years than previously expected by analysts at Exane BNP Paribas.

Hence, the companies in the sector would be able to manage their balance sheets and cover their dividends organically by 2018, the broker said in a research report sent to clients.

That was despite analysts Aneek Haq, Hussni Alkhuzai and Edward Pybus having cut their forecasts for the price of oil again to $35, $45 and $55 per barrel from 2016 to 2018.

Despite all of the above, and the fact that they were 50% below consensus estimates for 2016, valuations were "fair at best", Exane said.

Futhermore, their projections for free cash flow still required a 'leap-of-faith' when it came to the price of oil, the analysts wrote.

The broker lowered its target prices for BP by 3% to 330p, for Royal Dutch Shell´s London-listed shares by 14% to 1,700p and stood by its 1,110p target on BG Group.

Of the three, Shell was the only stock it recommended overweighting thanks partly to the defensive characteristics of its downstream businesses.