Shell vs BP: ‘undemanding’ valuations and big discoveries

Record-setting Shell (LSE:SHEL) shares today moved within 10p of the 3,000p threshold after a leading City bank lifted its price target alongside a positive stance on fellow Big Oil firm BP (LSE:BP.).

Highlighting Shell’s “very attractive” shareholder returns and a still “undemanding” valuation multiple, Berenberg moved its estimate on the Anglo-Dutch firm’s shares up by 50p to 3,300p.

• Learn with ii: What is Bed & ISA?| Open a Stocks & Shares ISA | ISA Offers & Cashback

The bank also retained its Buy recommendation on BP, although with an unchanged price target of 520p following an 8% year-to-date rise for shares to 474p.

Shell’s stronger financial footing and a record of 17 consecutive quarters of share buybacks worth $3 billion (£2.2 billion) or more have helped shares up by 30% since April.

They are up 8% so far this year and on the cusp of breaking 3,000p for the first time after touching an intra-day high of 2,991.5p in today’s session.

Shell plans to pay a fourth-quarter dividend of 37.2 US cents a share on 30 March, an increase of 4% on the previous quarter that leaves shares trading with a projected 2026 yield of 3.9%.

• Opportunities as UK banks, Relx and Rentokil slide
• Stockwatch: an enigmatic share offering an 8.5% yield
• BP hits skids as share buybacks scrapped

Assuming an unchanged quarterly buy back rate of $3.5 billion, Berenberg notes a total cash shareholder return of 10.5% for the 2026 financial year.

Berenberg said Shell has balance sheet room to maintain the buyback if it chooses, but that the outlook for the remainder of 2026 will likely remain linked to commodity prices.

Brent crude today traded at a seven-month high near $72 a barrel, which compares with about $60 a barrel in mid-December.

Berenberg notes that Shell continues to target growth of 10% per annum for free cash flow per share to 2030, driven by a combination of greater capital discipline, underlying operating cost savings and a focus on improving returns in underperforming businesses.

The current rate of the buyback programme should also reduce the share count by about 6.5%.

The bank sees limited near-term growth in Shell’s Exploration and Production business, offset by 4-5% compound growth for LNG sales volumes to 2030 as attractive projects ramp up.

Berenberg reiterated that some acquisitions are possible as Shell’s existing reserve life of 7.8 years at current levels of production is lower than the company would like.

In contrast to Shell, BP recently announced a decision to suspend share buybacks to focus on strengthening the balance sheet.

While the stock will lose the technical support of buybacks, Berenberg said free cash flow-to-equity generation remains strong relative to peers and that a significant reduction in gearing should strengthen the company and enhance equity value over time.

• 10 steps to generate a tax-efficient retirement income
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• eyeQ: Barclays, Vodafone, Glencore, US financials

Meg O’Neill, who has been in charge of Australia’s Woodside Energy since 2021, will become BP’s first female CEO when she takes on the role in April.

She joins with BP’s upstream outlook significantly boosted by its giant Bumerangue discovery in Brazil, where initial estimates point to around eight billion barrels of liquids being in place.

BP still has $15 billion of future divestment proceeds to deliver, while the oil giant has also increased its cost-savings target to between $5.5 billion and $6.5 billion versus 2023 levels.

Berenberg said: “A new CEO poses risks if the near-term strategy is less shareholder friendly, but with the buyback now cut to zero the risks cut both ways.

“Further divestment proceeds and restructuring could also drive a more rapid debt reduction than is currently envisaged, unlocking greater value. We remain Buy-rated, with a 520p price target.”