What’s ahead for BP, Shell and smaller oil players?

We asked Sam Wahab, energy analyst at Peel Hunt, which of the two UK-listed oil majors - BP (LSE:BP.) or Shell (LSE:SHEL) - he likes best, and where he sees value among the independent operators.

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Lee Wild, head of equity strategy at interactive investor: Hello. With me today I have Sam Wahab, energy analyst at Peel Hunt, to talk about the energy sector and what the future might hold.

Well, oil majors have certainly performed a U-turn on green strategies in that they’ve scaled back those ambitions. What do you think about BP right now with the new CEO, Meg O’Neill? Shares are at a 16-year high, but more to come or vulnerable?

Sam Wahab, energy analyst at Peel Hunt: Yeah, it’s been a really volatile period over the last five or six years for BP.

As a bit of background, we’ve seen quite a lot of turnover on a corporate level. So, whether that’s been a succession of CEOs and chairs that have been leaving posts over the years, and also from a strategy point of view, we’ve seen under Bernard Looney, they sort of reframed it as Beyond Petroleum instead of BP.

That seems to have been rowed back on and some of the issues that we’ve mentioned earlier that sped into that, and we’ve seen writedowns of $4 or $5 billion (£3.7 billion), most recently on what is the greener side of the business.

I think they’ve landed a good spot with Meg O’Neill. She seems very pragmatic. She’s bringing it back to the roots in terms of looking at more of the upstream side of the business, more the traditional sources of energy, but she still is promoting the other side as well. 

But, yeah, I like what I see there in terms of the outlook. You mentioned the share price. I think the market is recognising that transition into the more sort of traditional core parts of the business.

Just putting that into numbers, there is a real switch in the strategy towards cash flow, shareholder returns and, essentially, profitability. So, putting that into numbers, in terms of the upstream business, they’re slated to invest about $10 billion a year this year and next year, which is quite significant into the upstream business alone.

So, that is targeting 2.5 million barrels of oil equivalent per day by 2030. That turns it into, alongside its peer group, its super major peer group.

In terms of what that means for shareholders, they’re looking at distributing about 30% to 40% of operating cash flow in terms of their cap allocation back to shareholders through the cycle to 2030. So, that’s quite the hook, no?

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Lee Wild: Well, look, OK. So, let’s have a look at the other UK-listed oil major, Shell.

I always ask the experts to compare the two. So, in terms of share price performance, not much to choose between them, but what about in terms of the outlook and further upside potential for the share price?

Sam Wahab: I think a fair way to look at BP and Shell is that they are no longer traditionally trading, or viewed upon, as together, despite being the only two super oil majors on the London Stock Exchange.

I think it’s fair to say that BP is still very much a turnaround story, whereas Shell has gone all-in on some key assets, and that’s integrated gas and LNG. 

BP, as I say, they’re focusing on this sort of resurgence, building back up in terms of cap allocation and shareholder returns.

If I were to choose between the two, I would say if you want capital growth, it would have to be BP for me. It is a turnaround story. If you want high-quality, guaranteed steady earnings, it would be Shell.

But I think, overall, BP offers a much more capital growth-led opportunity, possibly because they are starting from a lower base from a valuation perspective than Shell. But I also think, as I mentioned, in terms of strategy shift with Meg O’Neill coming on board, it’s really changed a view in their operational outlook.

Lee Wild: OK. We’ve talked about the majors. Where do you see value around the independent operators?

Sam Wahab: Yeah, there’s quite a few.

Coming into this year, as analysts, pretty much across the board, most analysts have been forecasting about $65 oil flat. And that came through all the way through to mid to the end of February, and then we all know what happened.

Now everyone’s changed their forecast. So for this year, we’re year to date $94 on Brent, as in the actual year to date market is. Most analysts around $95 now for FY26.

They’ve uplifted to around $85 for FY27. This is significantly higher. And we talked about backwardation earlier.

So, a lot of valuations look very full from the independent landscape, and we’re seeing a lot of M&A, and we’ll probably come on to that.

But in terms of where I see some value, and it is an M&A story in itself, but EnQuest (LSE:ENQ) comes to mind. So, they recently entered into a transaction offshore Malaysia, where they picked up a package of assets for just over $830 million.

A significant deal for them, essentially served to more than double the size of the business, both on a 2P reserve basis, but also on a production basis.

And it’s an interesting place to work there. It was a competitive bid. They won it, and I think that’s a function of them being in the country for over a decade. They won Operator of the Year two years running, and they’ve got a very good relationship with the state and, by extension, Petronas.

So, what does that mean? Could that mean more deals to come? I think so. South East Asia is the hotbed at the moment, along with a few others around the world. 

But going back to our story, our talk earlier on about issues in the Middle East, West Africa and South East Asia, if you’re a producer there, you’re getting real premiums to the benchmark.

And so they are in a good place. There’s a lot of growth potential there. But the reason I say it’s one of the ones that I think is a top pick is, I don’t think the valuation has reflected that deal quite yet.

And it’s similar to Seplat Energy (LSE:SEPL) who did a deal in Nigeria a couple of years back. It only takes that conversion once the deal completes and people see the cash flows coming through and the potential yield that arises from it, that valuation gap starts to really narrow.

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Lee Wild: OK, so if we’re looking at M&A, as you mentioned, it’s West Africa and South East Asia. They are the two main areas you’re looking at?

Sam Wahab: I would say so, yes. And we’ve seen that, a few bids go in. So, Serica Energy (LSE:SER) bid for Pharos Energy (LSE:PHAR) earlier on this year, and then Ratio from Israel took that over. So, they were getting bid up.

We’ve seen Capricorn Energy (LSE:CNE) being bid for a number of times. That again has now landed. Genel Energy (LSE:GENL) have been bid for by DNO. So, it’s a real buoyant market, and I think that’s quite striking really, because when you see volatility in commodity pricing, people want it flat. Companies want it flat, so they can make an investment decision and say: ‘Where’s this going to be in five years’ time?’

We’ve seen oil go from $65 to $110, back down to $70 with the MOU, and now where it sits today at $112, and a lot of shocks along the way there. So, for them to make investment decisions in this market is very interesting, and it bodes well for activity going forward.

Lee Wild: Great. Sam Wahab, energy analyst at Peel Hunt, thanks very much for joining me today.

Sam Wahab: Thanks very much.