Both Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) have now beaten market expectations with their first-quarter results.
Shell reported current cost of supply earnings excluding identified items of $1.6bn for the first quarter. That’s significantly higher than the $1bn forecast by analysts, even though it’s 58% lower than during the same period last year.
In BP’s case, underlying replacement cost profit — an equivalent figure — was $532m during the first quarter. Analysts were expecting a $140m loss.
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Both companies are benefitting from strong refinery profits and the increasing effect of a year spent brutally cutting costs. Both companies have forecast dividend yields of 7.2% for 2016. In both cases, these dividends aren’t covered by expected earnings, but are expected to be maintained.
Are they both equally attractive?
Shares in both BP and Shell are close to 10-year lows. In my view, now is a reasonable time to invest in either company. I believe the oil market is now approaching a point where it will start to rebalance.
However, I believe there are some big differences between BP and Shell. The recent performance of both stocks suggests that the market shares this view. Shell’s share price has risen by 12% so far in 2016, compared to just 2.5% for BP.
Despite this, Shell still looks slightly cheaper based on latest broker forecasts with a 2016 forecast P/E of 25, falling to 12.6 in 2017. The equivalent numbers for BP are 31 and 13.8.
What’s the difference?
I think there are good reasons for Shell’s outperformance. Although BP’s Gulf of Mexico settlement means that the drag on earnings from this disaster should start to diminish, BP’s vision for its own future isn’t as clear as that of Shell.
Shell’s bold purchase of BG Group may now look a little expensive, but over the long term it seems likely to pay off. The large-scale gas and deepwater oil assets acquired from BG fit well with Shell’s own portfolio. By selling assets that don’t fit these two categories and focusing on cost and scale, Shell should be able to provide reliable long-term cash flows.
BP’s long-term strategy is less clear. The firm has been forced to shrink by selling assets to help meet the $55bn cost to date of the Gulf of Mexico disaster. However, the group’s only major strategic move in recent years has been to buy a 20% stake in Russian oil giant Rosneft.
In BP’s Q1 results, chief executive Bob Dudley said that “development of our next wave of material upstream projects is well on track.” It’s true that BP does have some large, good quality assets that should provide future profits.
However, I still feel that BP’s future is more uncertain. One possibility is that BP will continue to focus on fewer, better assets and may shrink further, while continuing to generate a lot of cash. Indeed, if global oil demand does continue to grow more slowly than expected, this approach could make sense for BP and be rewarding for the firm’s shareholders.
