Royal Dutch Shell rating downgraded to 'hold' post BG aquisition

LONDON (ShareCast) - Royal Dutch Shell (Xetra: R6C1.DE - news) on Tuesday had its rating downgraded to 'hold' from 'buy' by analysts at Jefferies in the wake of the oil major's acquisition of BG Group (LSE: BG.L - news) , announced last week. "The BG acquisition, while sound strategically, negates our previous investment thesis. We believe Shell (LSE: RDSB.L - news) paid a full price that constrains its financial flexibility - the primary driver of our previous view that Shell was the most defensive stock in the sector if oil prices remain low," said Jefferies' analysts.

The analysts cut its target price on Shell to 2200p from 2450p. "We expect that this deal could very well turn into a big success after being fully integrated, but over the next 18 months we expect it will be difficult for Shell stock to outperform," they added.

Drilling into the acquisition, Jefferies' analysts said that at the close of the transaction, they expect Shell's net debt to reach $62bn and its net debt/capitalisation ratio to be low- to mid-20%. As a result, debt service will become a priority use of cash, then dividends, then buybacks and capital investment, they said.

That said however, with debt servicing the priority, use of cash a progressive dividend becomes unlikely. "Shell has committed to maintaining the current dividend ($1.88/ share annum) and we see little risk to a cut," added the analysts.