Morgan Stanley upgrades Shell and BP

Morgan Stanley upgraded its recommendation for shares of Shell from 'equalweight' to 'overweight', telling clients that the oil major's new distribution policy revealed insiders confidence in the firm's ability to throw off cash.

"With a dividend yield of 5.4% and new guidance for annual dividend growth of 4%, Shell shares offer a steady-state total return of ~9.4% per year," they argued.

Was it just over confidence on the part of management? No, they said.

Projections for 4% annual growth were likely feasible, a 9.4% rate of return was higher than its cost of capital and its dividend yield might compress, and in so doing front-load some of those future returns.

All in all, they also bumped up their target price from 991.0p to 1,180.0p, adding that like sector peer Total's, shares now offered more than 20% potential upside.

Within the same research note, they upgraded BP from 'underweight' to 'equalweight'.

Yes, there were question marks around the firm's earnings and cash flow outlook - even if its strategy succeeded - and lack of dividend growth.

Nonetheless, "following underperformance and its yield expanding to 8.1%, we suspect these factors are also discounted."