Interactive Investor

Q1 results preview: BP and Shell

As the oil majors prepare trading updates ahead of first-quarter results next month, Graeme Evans runs through the latest thinking among analysts, including new price targets for both stocks.

4th April 2024 15:38

by Graeme Evans from interactive investor

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Shell and BP (LSE:BP.) shares have been given a first-quarter boost after the Brent crude price hit a five-month high and the City upgraded its view on downstream margin performance.

The FTSE 100 heavyweights are up more than 7% so far in 2024, fuelled by improved Big Oil earnings expectations for quarterly results next month and the year as a whole.

A note published by UBS today said the opening quarter is traditionally a strong one and that this year's performance appears to have been no different.

The bank has lifted its industry earnings estimates for 2024 by an average 3%, adding that it seems likely that “we have now reached the end of the downgrade cycle for the sector and instead are now at the beginning of an upgrade one”.

Shell (LSE:SHEL) is due to post a trading statement tomorrow before its quarterly results on 2 May, while BP’s update is on Tuesday ahead of full-year figures for the three months on 7 May.

UBS’ earnings estimates for the European oil and gas industry sit 8% higher than the City consensus, ranging from 11% for Shell to 4% for BP.

It said: “Refining and petrochemical margins have been stronger than we had expected since the start of the year and have more than offset the impact of weaker natural gas prices.”

Margins fell back last year after hitting record highs in 2022 due to significant disruption to refining operations caused by Russia’s invasion of Ukraine.

Low oil stocks, output cuts by Saudi Arabia and other OPEC+ members, geopolitical tensions and robust economic growth have also bolstered the price of Brent crude in recent weeks.

Bank of America said this week it now sees an average Brent crude price for the year of $86 a barrel, peaking at around $95 a barrel in the summer.

UBS continues to expect a partial reversal of OPEC+ policy from July, although it warns any further cuts or drop in Russian production could lift prices above $90 a barrel.

For natural gas, the bank has cut its global price forecasts for 2024 and 2025 by an average 11% while it continues to expect prices to come down from 2026 as more LNG comes on stream. For refining, it has raised its 2024 margin assumption by 34%.

The combination of new earnings estimates as well as the rollover of valuations through to the first quarter of 2025 leads it to increase its price targets by an average 6%. Shell has a Neutral recommendation and target of 2,748p, with BP rated a “Buy” with 512p valuation.

The bank’s most preferred stock is BP, adding that any results weakness should be viewed as a buying opportunity. It notes the 10% discount that BP trades to large cap peers, as well as the relatively low expectations for 2025 earnings and the potential catalysts to come from dividend raises and upstream disposals.

In the case of both companies, UBS sees no change in the level of their first quarter dividend distributions compared with the awards disclosed for the previous three months.

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