MIDAS SHARE TIPS: BP and Shell have a delicate path to tread to navigate oil and gas markets, but as the energy giants cash in, should you too?
According to the late Poet Laureate T.S. Eliot, April is the cruellest month. His words will certainly hit home this spring when the cost of electricity and gas rockets by more than 50 per cent, piling pressure on households across the country.
Soaring petrol prices have hit incomes too, rising 40 per cent since summer 2020 to more than £1.45 a litre, a near-record high.
No surprise then that energy giants BP and Shell provoked outrage when they unveiled bumper profits in the past fortnight – nearly $13billion (£9.5billion) from BP and just over $19billion from Shell. The two companies added insult to injury by announcing a rebound in dividend payments and billion-dollar buyback programmes – purchasing their own shares from investors, which should feed through to higher dividends in future.
All at sea: BP and Shell provoked outrage when they unveiled bumper profits in the past fortnight
Both companies are used to being under attack. When they deliver good results, they are accused of profiteering. When results are poor, as they were in 2020, the shares are shunned by the stock market. And, whether results are fabulous or filthy, both businesses are under siege from environmentalists for polluting the planet with greenhouse gases.
The breadth of criticism makes life hard for investors. But one simple question should cut through the noise: are these shares worth buying?
In September 2020, BP stock was trading at below £2 and Shell was under £9. Both shares have more than doubled since then – with BP at £4.17 and Shell at £20.39. Investors who bought in the dog days of 2020 are sitting pretty but, even at current prices, BP and Shell are comparatively cheap.
Both shares trade at multiples of around ten, which means the stock price is roughly ten times their earnings (or profits) per share. That compares with a multiple of more than 15 for the UK stock market as a whole, while in the US, shares are trading at an average multiple of 25.
In other words, BP and Shell are trading at a discount to many other large companies, principally because market watchers are worried about how these businesses will be affected as the world tries to wean itself off fossil fuels.
The concerns are understandable. With politicians across the globe pledging to hit ‘net zero’ carbon emissions by 2050, it is hard to see a place for oil and gas majors. Yet BP and Shell have concrete plans to move away from dirty brown fuels and focus increasingly on fashionable green energy. They have both pledged to hit net zero by 2050 and have already started to make the transition, reducing oil and gas production, while investing in solar and wind power, hydrogen and biofuels, electric vehicle chargers and carbon capture and storage.
Even as BP boss Bernard Looney and Shell chief executive Ben van Beurden spend billions of pounds on these new businesses, they are trying hard to keep shareholders on side, hence the pledges to buy back shares and deliver robust dividends.
These promises are not made lightly. BP is paying a total dividend for 2021 of 21.6 cents (16p). The company says dividends are a priority and Looney hopes to increase payouts by 4 per cent a year until 2025. Shell is paying out 89.4 cents in dividends for last year and also intends to reward shareholders with 4 per cent annual dividend gains.
These statements of intent follow a rocky couple of years. Both firms were forced to slash dividends in 2020 and have now reset payments to a rate where they can comfortably increase them even if oil falls sharply from its current rate of $90 a barrel.
Despite the recent blip, the oil majors’ long term dividend record should provide some reassurance. BP is valued on the stock market at just over £80billion and has paid out the same amount in dividends since 2005. Shell is valued at £150 billion and has paid out £120billion in dividends over the same period, according to AJ Bell. In other words, shareholders have been richly rewarded.
Looking ahead, that should continue, at least for the next five years. BP and Shell’s profits tend to wax and wane with oil and gas prices. Both markets can be volatile but they tend to move in sync with inflation. When inflation is rising, therefore, energy prices tend to rise and BP and Shell profits increase too.
For consumers, that spells misery. For investors, that can spell opportunity.
Midas verdict: BP and Shell have a delicate path to tread. They have to convince governments and eco-warriors that they are serious about becoming green. They have to navigate choppy oil and gas markets. They have to defend themselves when energy prices – and their profits – soar. And they have to reward shareholders for sticking with them. Amid all these moving parts, it can be hard to assess whether these stocks offer value but today, the investment case seems pretty clear. BP, at £4.17 and Shell, at £20.39, should deliver gains for shareholders. Both have set out their stall for the future. Both provide a hedge against inflation and buying the shares can offset some of those painful increases in household energy prices.
Traded on: Main market Tickers: BP, SHEL Contact: bp.com or 0800 701107 and shell.com or 020 7934 3363