The sector has already done well, but there could be more to come, and dividends too.
Big Oil's cash flow juggernaut looks set to deliver more upside for shareholders when the industry's earnings season gets under way against a backdrop of surging commodity prices.
Bank of America believes the third quarter won't be the last to show consensus beats and confident outlook statements as the sector's “redemption” from the dividend cuts and loss of investor trust seen in 2020 continues.
Even after the recent share price rallies in the sector, the bank's analysts still see the potential for about 35% of market capitalisation to be returned to shareholders from a combination of dividends and buybacks by 2025.
Its top picks in European oil and gas include Royal Dutch Shell (LSE:RDSB), which is due to post third-quarter results on 28 October. Shell is widely expected to step up the pace of its buyback programme in the current quarter, having just struck a deal to reduce debt through the sale of Permian basin assets to ConocoPhillips (NYSE:COP) for $9.5 billion (£7 billion) in cash.
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Shell's B-listed shares are up 25% since 10 September, while BP (LSE:BP.) is 22% stronger over the same period as the ongoing rally in commodity prices boosts momentum in the sector. BP's third-quarter results are due to be published on 2 November.
Brent crude this week traded at a three-year high of more than $85 a barrel, prompting UBS wealth management analysts to raise their estimate for the December to March period to $90 and to $85 over the remainder of 2022.
They said today: “We previously thought high oil prices might prompt OPEC and its allies to agree to increase production by more than 400,000 barrels per day in December at their next ministerial meeting on 4 November.
“But comments from Saudi, Russian, and UAE officials suggest that the group has no plans to increase production at a faster pace.”
High natural gas prices in Asia and Europe have driven a switch to crude oil in the power sector, at a time when oil inventories are at their lowest level since 2015.
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The UBS note warned: “Modest supply growth amid recovering demand means that oil inventories are likely to continue to decline over the coming weeks and keep oil prices supported.”
Shell is the world's biggest seller of liquefied natural gas (LNG), meaning its results should also get a significant boost from recent record natural gas prices. An update at the start of October tempered expectations a little, however, when Shell reported the lowest LNG output since 2016 as a result of additional maintenance and other constraints.
There was also a $400 million (£294.4 million) hit to oil earnings from damage to facilities in the Gulf of Mexico caused by Hurricane Ida in August, leading UBS to describe the overall trading performance as one of “swings and roundabouts”.
Overall, Bank of America expects Big Oil industry earnings to beat consensus by 4% on average in the third quarter and for the 2022 consensus to offer a 15% free cash flow upside.
The bank added: “As a result of another set of strong quarterly cash flows, we expect the pace of de-gearing to surprise positively and - as we assume capital discipline broadly holds - more upside to shareholder distributions.
“As such, the sector's redemption post 2020 dividend cuts and loss of investor trust remains on track with Q3 the third consecutive - but not the last - quarter showing consensus beats and confident outlook statements.”
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