BP Is the Favourite as Oil Shares Stay on the Boil; MARKET REPORT

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Byline: TOM NICHOLLS

OIL markets are showing little sign of cooling off. The potential for disruptions to supplies from some of the world's biggest producers is expected to put a floor under prices - currently hovering around $65 - for the foreseeable future.

Fears that Iran might stop exporting if sanctions are imposed because of its nuclear programme, political unrest in Nigeria and concerns that lower Russian gas supplies to Europe could prompt a leap in oil demand are all expected to keep the market on edge.

That may mean more bumper earnings for oil producers, but some are a better bet for investors than others. Merrill Lynch is sticking to its bullish sector stance, but prefers BP to Royal Dutch Shell.

The Anglo-Dutch major, it says, is "paying the price for chronic underinvestment over the past five years, which although now being addressed via higher reinvestment, will prove to be a drag on earnings, profitability and shareholder distribution relative to BP until at least the end of the decade."

Although there has been a pickup in Shell's exploration and production performance recently, Merrill is expecting another weak reserves-replacement figure from the company - in the 70%-80% range, it says. It also predicts that Shell will be less generous than BP in its redistribution of funds to shareholders via dividends and buybacks.

BP is looking set for a " significant increase in distribution" as the proceeds from its recently completed $9 billion ([pounds sterling]5 billion) Ineos disposal are recycled back to investors. In total, the broker estimates, BP will repurchase in the region of $20 billion-worth of shares in 2006, compared with $10 billion for Shell.

As a result, Merrill has downgraded its rating on Shell to neutral, given that its shares are now within 2% of its 2000p target.

However, it continues to rate BP a buy and has set a share-price target of 730p, implying an upside of nearly 10%.

Winners and losers on the High Street are also starting to emerge as Christmas trading figures trickle in. Shares in Anglo-French retailer Kesa Electricals, which runs the Comet chain of stores, came under pressure yesterday on the back of a disappointing trading statement. …