Merrill downgrades BP, cites mounting M&A and dividend risks

The bank said incorporating its reduced macro forecasts - which suggest Brent oil prices will not recover far above $60 a barrel until 2018 - into its BP estimates indicates the company will run persistent and sizeable free cash flow shortfalls for the foreseeable future.

“This will in our view increase the likelihood of BP issuing equity for more M&A as it replenishes its resource base under threat from dilution, as it cuts more capex to fund its dividend – the ‘path of pain’ is even longer.”

Merrill said although BP may accept an increase in its financial leverage to help maintain its dividend while waiting for the macro environment to improve, it expects an annual free cash flow shortfall of around $5bn to ultimately require significant repair measures.

At 0955 BST, BP shares were down 2.6% at 346.60p.