BP PLC (NYSE: BP) has perhaps the highest dividend yield of the global oil giants. While concerns over how sustainable the dividend yield is are not new, Merrill Lynch has weighed in with some concerns ahead of BP’s Downstream investor day next week.

According to Merrill Lynch’s Christopher Kuplent and team, BP pays one of the most challenged Big Oil dividends. That payout is said to require Brent crude above $60 per barrel for free cash flow coverage, or alternatively relying on a doubling in its Downstream free cash flow as guided by BP to be achieved over the next five years.

The Merrill Lynch report is reiterating a more bearish outlook on BP’s Downstream earnings. The firm has a Neutral rating, and the 440GBp (UK) price objective was under the 464.05 GBp current price. In dollar terms for the New York-traded America depositary shares (ADSs), Merrill Lynch’s $34 local price target was under the prior $35.91 share price.

Tuesday’s report noted that a bullish 2021 outlook relies on Downstream free cash flow doubling. The company has promised significant cost cuts and organic growth in the Downstream business, but the report showed that this far exceeds the consensus estimates and the Merrill Lynch estimates.

The report suggests that BP remains stuck on the “path of pain” longer than most peers. It said:

We believe more detail on near-term steps as well as more evidence of sustainable organic growth from next week’s Downstream investor day is necessary to surprise positively. … We believe BP will remain one of the few Big Oils to continue to see gearing increase into the second half of 2017 (we see >30% by year-end without further disposals). Although mostly due to about $5 billion “inorganic” oil spill payments, we reiterate our view that BP will require more steps on the “path of pain”, i.e. dilutive scrip dividends and asset disposals: As a case in point, BP’s latest $1.7 billion disposal announcement means the loss of the asset (SECCO JV) that generated most of BP’s approximately $400 million EBIT in petrochemicals last year.

As a reminder, BP shares have a yield that screens as over 6.6% for the ADSs and 6.8% for the locally traded shares in London. And on the dividend, the Merrill Lynch view is that BP’s free cash flow yield is still less attractive than its peer group. The report said:

Our 2018 free cash flow yield at less than 4% compares unfavourably against BP’s peers averaging about 6%. We therefore maintain our preference for Shell (Buy) – still offering upside potential to our price objective as well as better visibility on how to return to organic free cash flow generation by year-end 2017.

Merrill Lynch’s investment rationale also weighed in on BP:

Within our global Supermajor framework, BP shows a share of production from long life assets at peer group average. We believe outstanding litigation uncertainty in the US has diminished if not fully removed further NPV and liquidity risks. Low oil prices result in significant free cash flow shortfalls in 2016, but should improve into 2017 and 2018. In the meantime, BP may strain its financial gearing and/or organic resource replacement – which still leaves the risk of more equity-funded M&A activity.

BP ADSs were down 0.1% at $36.04 in midday trading on Tuesday. That is in a 52-week range of $30.66 to $38.68 and with a consensus analyst target price from Thomson Reuters of $37.84 per ADS.

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