Goldman Advises Investors to Switch to Shell From BP

By Nicholas Larkin and Ben Farey

Oct. 17 (Bloomberg) -- Investors should switch to Royal Dutch Shell Plc from BP Plc as Europe's largest oil company has underperformed its rival the past month and will offer better cash-flow growth from 2010-13, Goldman Sachs Group Inc. said.

Goldman raised Shell, based in The Hague, to ``buy'' from ``neutral'' and lowered BP to ``neutral'' from ``buy,'' London- based analyst Michele Della Vigna said today in a note to investors.

London-based BP, Europe's second-largest oil company, has outperformed its competitor by 10 percent the past month and is close to the top of a two-year relative trading range with Shell, Vigna said. Crude oil has plunged more than 50 percent since reaching a record $147.27 a barrel in July.

Shell's Class A shares traded in London gained as much as 8 percent today and were up 72 pence at 1,366 pence as of 12:06 p.m. local time. BP added 4.6 percent to 415.75 pence.

``The five major new projects that Shell is developing will add $10 billion extra cash flow to Shell by 2012,'' Vigna said in the report. ``We believe that the high exposure to marketing will provide an edge versus the fall in crude prices, leaving the company better positioned than the rest of the industry in a falling crude price environment.''

New Projects

Shell's new projects scheduled to start from 2010 include the Pearl gas-to-liquids development in Qatar and the Canadian oil sands Athabasca expansion. It also plans to press ahead with the deepwater Perdido development in the Gulf of Mexico, the Sakhalin 2 project off Russia's eastern coast and the Qatargas 4 LNG project. These will add $10 billion of extra cash flow to Shell by about 2012, based on oil at $85 a barrel, Goldman said.

Goldman said the main risk for Shell is its high capital expenditure program at a time of falling oil prices, which could affect cash flow.

Still, Goldman said Shell has one of the ``most healthy'' balance sheets in the industry and could sustain two years of oil at $50 a barrel and still have a similar debt to capital ratio as BP at about 19 percent.

BP's third-quarter earnings are scheduled to be released on Oct. 28, followed by Shell on Oct. 30.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net or Ben Farey in London at 2369 or bfarey@bloomberg.net