Heavyweight oil majors BP and Royal Dutch Shell came under pressure after broker Barclays Capital raised the prospect of both companies cutting their dividends if the oil price continues to decline.
In a bearish sector note, Barclays Capital analyst Tim Whittaker advised clients to sell both BP and Shell as he believes they are overvalued compared to European peers, Total and Eni.
“We believe the oil sector is entering a steeper and longer downturn than either the oil or equity markets imply, and that large-cap oil shares are not as defensive as currently priced. After 30pc outperformance in the last 12 months, we initiate coverage with a negative sector view. BP and Shell are our key underweight stocks,” wrote Mr Whittaker.
He points out that with less free cash flow, over the next few years dividends at both companies are likely to be paid out to shareholders using debt.
Mr Whittaker warned: “Most integrated companies can do this, given their strong balance sheets. However, the market has priced the sector assuming little if any dividend risk, which may not be the case if the oil price falls further or, as we assume, stays lower for longer than the forward curve implies.
“If margins remain low there may come a point when company managements will have to assess whether shareholder returns are best served by maintaining dividends at the cost of growth funding, or by taking the longer view and perhaps taking dividend holidays and building advantaged positions for the next upturn”.
BP shed 9 almost 2pc to 453½p and Shell lost 39p to £15.58.
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