BP Versus Shell – Which One Is A Better Bet For Shareholders?

by Trefis Team
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The last three years have been a nightmare for not only the oil and gas companies, but also for their investors globally. The energy sector, which had yielded captivating returns post the economic slowdown of 2008, has gone into the worst-ever commodity downturn in the last couple of years. The oil slump has not only led to a sharp drop in the profitability of oil and gas producers worldwide, but has also wiped out the returns that the investors had accumulated from these companies. That said, large integrated companies, such as Exxon Mobil, and Chevron, have held a relatively firm ground compared to the independent oil and gas producers, and are likely to survive the ongoing trough. In this article, we compare two of the largest European integrated energy companies — BP Plc. and Royal Dutch Shell. We will analyze how the commodity turmoil has impacted their returns, and which of the two has a potential to generate better returns in the future.

See Our Complete Analysis For BP Plc. Here

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Source: Google Finance; US Energy Information Administration (EIA)

Stock Appreciation

BP and Shell were trading at over $53 and $83 per share, respectively, just before the dawn of the commodity slowdown in mid-2014. Since then, crude oil prices have dropped from $110 per barrel in 2014 to less than $25 per barrel in 2015, causing the two companies to lose a significant portion of their market values. However, given the integrated nature of their businesses, these two companies mitigated their upstream losses with their downstream operations, and managed to remain afloat over the last couple of years. Further, with the recovery of the crude oil prices in the second half of 2016, both BP and Shell recovered a large chunk of their market value that was eroded in the slowdown. However, due to the susceptibility of these stocks to volatility in commodity prices, the two stocks have been on a downtrend over the last 2-3 months.

Now, when we compare the two stocks, we see that the two companies bottomed out in early 2016, and have managed to recoup some portion of their lost value in the last one year. Yet, the value of both the stocks is lower than what it was at the onset of the oil slump. That said, from the table below, we figure that while Shell has managed to regain a fair amount of its eroded value, the pace of its recovery has been slower than that of BP’s. Thus, BP, despite an overall decline in its share value, has delivered a higher compounded annual rate of return (CAGR) to its shareholders over the last couple of years.

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Dividend Yield

Dividend yield is a critical, and a closely watched metric for investors who seek a regular income from their investments. Both BP and Shell are dividend aristocrats as they not only pay out handsome dividends to their shareholders, but have raised the amount of their dividends for at least 25 years in a row. On comparing the two on this parameter, we figure that BP has maintained an annual dividend of $2.40 per ADR in the last two years, despite its dwindling profitability and cash flows. Shell, too, has stagnated its annual dividend payments at $3.76 per ADR as the persistently low commodity prices have taken a toll on its cash flows. Yet, the latter has an average dividend yield of 6.4% as opposed to the former’s average yield of 6.2%. This implies that a shareholder investing one dollar in Shell would earn a higher return, in terms of dividend, compared to what he would generate by putting the same money in BP.

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Return On Equity

Return on equity, or ROE, is another important metric that investors consider while investing in a company. This number explains the profits generated by the company for each dollar invested by the shareholders. The table below depicts that Shell has generated an average ROE of 4.1% in the 2014-2016 time frame, while BP delivered a negative average ROE for the period. BP’s declining profitability has led to an incessant drop in its shareholders’ equity, resulting in lower, or negative returns for its investors. On the contrary, Shell has managed to recuperate its dwindling profits, and has succeeded in growing its shareholders’ value in the last couple of years. Hence, we believe that Shell holds an upper hand compared to BP as far as the return on equity metric is concerned.

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Based on the above discussion, we believe that in comparison to BP, Royal Dutch Shell has the potential to deliver enhanced returns to its shareholders through capital appreciation, dividends, and return on equity. However, the returns of the two companies are highly dependent on their operational performance and managerial expertise, coupled with the timeliness of the rebound in commodity prices.

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