LONDON (ShareCast) - (ShareCast News) - The risk/reward trade-off in 'big oil' has improved despite the unsustainably low price of oil, analysts at Liberum said on Friday.
Indeed, unless M&A opportunities appear or the intensity of investments falls fast, then the best thing these companies can do is to return the bulk of profits to shareholders.

So while funding their dividend policies through organic growth in free-cash-flow is "challenging", strong balance sheets, asset sales and scrip dividends will continue to plug the gap until oil prices recover.

To take note of, reductions in operating and capital spending means the minimum price of oil required for them to 'breakeven' has in fact fallen.

The cancellation of the scrip dividend will be worth watching as a possible signal that the path to sustainable cash flow is clear.

On the basis of the above, the broker upped its recommendation on BG Group and BP to 'buy' from 'hold'. The target prices for each were improved to 1,165p and 405p, respectively.

In the case of BG Group the broker added it was convinced the Shell bid would go through, offering low-risk upside potential of 17%.

Nonetheless, their top-pick in the space remained French oil major Total, which they described as 'best-in-class'.

Their recommendation on Royal Dutch's B shares was kept at hold with a 1,850p target.

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