Interactive Investor

Shell vs BP shares: which is the City’s top pick?

In a year when many predict softer commodity prices, investors are urged to be careful. But as this analyst reviews upcoming results, they name the UK oil major that gets their vote.

24th January 2024 15:48

Graeme Evans from interactive investor

A preview of Big Oil’s earnings season has given Shell (LSE:SHEL) “top pick” status after the FTSE 100 giant was backed to deliver higher shareholder returns in 2024.

Bank of America said range-bound energy prices, fading refining margins and ongoing inflation meant it recommended a defensive stance ahead of the sector’s fourth-quarter results.

The caution has been reflected in the start of year performance by the London-listed shares of Shell and BP (LSE:BP.), with falls of 8% to 2,375p and 4% to 450.6p respectively.

Despite recent earnings downgrades, the bank believes consensus forecasts for Europe’s major oil stocks in the fourth quarter are still too optimistic.

It points out that BP leads super-major peers Shell and TotalEnergies SE (LSE:TTE) in terms of consensus earnings downgrades – yet its share price has relatively outperformed following the appointment of Murray Auchincloss as chief executive.

The bank said: “In our view, this suggests investors have invested in what BP’s newly confirmed CEO will be able to promise in terms of cash returns despite BP’s weaker balance sheet.”

The bank’s analysts expect updates to 2024 capital allocation guidance will help to show whose financial framework is more or less resilient among Europe’s Big Oils.

It said: “Relative alpha will continue to stem from the degree of resilience in shareholder returns. We reiterate Shell and TTE as our top picks benefitting from their cash returns requiring less than $70 a barrel oil price break-evens.”

When Shell reports figures on 1 February, the bank expects an unchanged fourth-quarter dividend of $0.33 a share for payment on 25 March. This is the same as the previous two distributions after chief executive Wael Sawan upped the second quarter award by 15% following his pledge to focus on capital and spending discipline.

Bank of America sees Big Oil’s shareholder distributions falling 2% year-on-year in 2024, but with Shell and TTE forecast to deliver increases above 5%.​​​​​​​

With Shell’s net debt continuing to drop quarter-on-quarter to below $40 billion (£31.4 billion), the bank’s analysis sees room for positive payout surprises. Its base case for 2024 is dividend growth of 7% and $16 billion (£12.5 billion) of buybacks, resulting in a 11% total cash yield.

The bank believes that BP, which reports results on 6 February, will give unchanged first-quarter buyback guidance as it sticks to a 60% payout policy of surplus free cash flow.

However, it added: “We see more downside than upside risks considering BP’s lacklustre cash flow outlook into 2024.” The fourth-quarter dividend due for payment on 28 March is forecast to be unchanged at 7.27 US cents, representing a 10% increase on a year earlier.​​​​​​​

BP’s clean net income for the quarter is forecast to be just below $3 billion, representing a fall of 9% on the previous three months. Shell, which recently warned it will include one-off impairment charges of up to $4.5 billion with its results, is set to disclose a slightly higher clean income figure of $6.5 billion.

The bank has price targets of 3,200p for Shell and 500p for BP. It added: “We believe that European energy investors should position themselves defensively into a softer commodity price environment this year.”

UBS analysts recently lowered their price target on Shell from 3,000p to 2,600p, noting it is trading at premium as investors have focused on Sawan’s increased financial discipline.

The Swiss bank said: “The scale of the business means any changes made now will take many years to have an impact. In the interim, we see increasing risks related to a cut to consensus estimates, a slowdown of the share buyback and a gradual rebalancing of the LNG markets.”

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