Since the start of the year, BP (LSE:BP) shares have fallen by 2.5%, while the Shell (LSE:SHEL) share prices has risen by 8.5%. But which FTSE 100 oil company is the better buy at today’s prices?
BP shares trade at a lower price-to-earnings (P/E) ratio than Shell, implying the market is more optimistic about the latter. And I think their different approaches to the energy transition means the market has this one right.
Energy transition
The energy transition presents a dilemma for oil companies. They can either invest in renewable energy projects, or stick to hydrocarbons and use their cash for dividends and share buybacks.
One problem with investing in renewable energy projects is that they tend to be expensive and generate low returns. Another issue is oil companies don’t have an obvious technological advantage in this industry.
Sticking with hydrocarbons is also risky, though. Even the most optimistic oil forecasts anticipate a reduction in demand as electric vehicles inevitalby replace internal combustion engines.
BP and Shell have taken different approaches to try and resolve the dilemma. And this explains the divergence in their share prices since the start of the year.
BP
BP has attempted to shift its portfolio towards renewable energy. But this has proved a challenge, as its offshire wind ventures in New York demonstrate.
The company previously won a contract with the state of New York to build an offshore wind farm. But as high inflation and rising interest rates pushed up costs, the project had to be scrapped.
The failure of the project cost BP around $540m in impairment charges. But after receiving approval for another project earlier this week, there’s room for optimism going forward.
Shell
By comparison, Shell has largely avoided committing capital to renewable energy projects. Instead, it has boosted its dividend by 25% while spending $11bn on share buybacks and investing in its gas business.
The strategy of sticking to traditional areas of expertise mirrors the approach taken by their US counterparts. Both ExxonMobil and Chevron have been expanding their oil capacities, rather than pivoting to renewables.
The risk with this is that oil prices are arguably being sustained by factors that will prove temporary in nature, such as the war in Ukraine. So this might be as good as it gets.
My verdict
Right now, BP shares come with a 5% dividend, while Shell has a 4% yield. That’s not enough to cause me to think the former is a better buy at today’s prices, though.
BP’s strategy concerns me. Investing heavily in projects that are expensive and offer low returns looks risky, especially in an area where the company lacks an obvious advantage.
Shell, on the other hand, seems to have a much more disciplined approach with its capital. There are risks with underinvesting in a sector in transition, but I expect the company to find better opportunities over time.
As a result, I like Shell’s long-term prospects better. And that’s the most important thing for me when it comes to investing.
