Shell 'particularly challenged' if oil prices continue to fall, says Citi

Citi said the attraction of high dividend yields and the concept that they held more worth was understandable but questioned whether investors were correctly taking into account the costs involved.

For Citi, it mattered how those dividends would be covered.

In a research note sent to clients on Wednesday morning, the bank's analysts said: "Constraining capex is a short-term solution where the consequences can be difficult to measure in the investment time-frames of a large oil company. We think SEC reserve replacement – despite some limitations – is the best tool that the market has to judge."

Citi said its Dynamic Sensitivity Tool (DST) model concluded that Big Oil had the potential to push breakevens, the point at which capex and dividend are covered, but with low oil prices, companies would see reserve life contract first.

"In our view, reserve life will be a rich source of differentiation with low-cost asset holders or active acquirers faring well and those with a lack of 2017 activity looking most challenged," the analysts wrote.

At Citi's $55 a barrel base case, the analysts awarded Eni, Chevron, Total and ConocoPhillips with 'buy' ratings, but hit Shell with a 'sell' rating due to its "dramatically falling reserve life."

At the top end of the scale, at $65 a barrel, BP and Repsol entered the 'buy' conversation, Citi said.

On the other end, at $45 a barrel, Shell was said to look "particularly challenged" to find opportunities to halt its already low and falling reserve life, with Eni and Total as the only undervalued stocks at that price level.

On Tuesday, Shell announced that it would be paying its dividend solely in cash, an indication that major energy companies had started to put a historic downturn in the market in the rearview.

The Anglo-Dutch company also said it was scrapping a two-and-a-half-year-old program that gave its shareholders the option to receive dividends in discounted stock, in what is known as a scrip programme.

While the scrip was a popular choice among bullish investors, it was also one that agitated many others who claimed it diluted the value of their shares.

As of 1555 GMT, Shell shares had fallen back on the LSE 0.84% to 2,427.00p.