Morgan Stanley has downgraded Statoil ASA(ADR) STO to Equal Weight from Overweight on valuation, and prefers Royal Dutch Shell plc (ADR) (NYSE: RDS-A) and BP plc (ADR) BP within the space.
"Strong outperformance YTD has left Statoil shares trading at a ~5 percent yield – the lowest amongst the EU Majors. We still see solid free cash flow growth out to 2018, but near-term momentum is greater elsewhere. Top picks are Shell and BP," analyst Haythem Rashed wrote in a note.
The analyst noted that the shares of Statoil haves outperformed the sector by 15 percent since the oil price bottom, "driven by leverage to rising oil prices, strong focus on cost and capex discipline, and a number of successful upstream start-ups."
That said, Statoil's forward yield has jolted to about 5 percent, from 6.8 percent in January, now leaving them "trading at the lowest yield of the European Majors, and well below Overweight-rated Shell (6.8 percent) and BP (6.7 percent)."
"Historically, Statoil shares have traded between a 4–6 percent dividend yield with few exceptions, hence valuation now appears less compelling in both absolute and relative terms," Rashed noted.
Startups And Other Catalysts Ahead
Despite Statoil already delivered four start-ups this year, the analyst noted that the pace of project delivery moving forwards is likely to slow before another wave of startups in the second half of 2017 into 2018.
"We think this will limit further upside to consensus FCF expectations in the near term," Rashed continued.
"Meanwhile," according to Rashed, "peers such as Shell should enjoy a period of strong FCF growth over the next 12 months and largely cover its dividend with organic FCF by 2017, compared to about 65 percent coverage for Statoil over the same period."
ADRs of Statoil closed Thursday's regular trading session at $17.32. In Friday's pre-market, ADRs were seen down 0.12 percent at $17.30.
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