BP vs. Shell – Who Has Better Assets And Operational Efficiency?
Plummeting commodity prices over the last couple of years have severely impacted the profitability of oil and gas companies worldwide, throwing a number of them out of business. However, companies that continue to hold high-quality assets, efficient cost structure, and an experienced management, have been able to weather the current commodity slump and are likely to emerge undefeated from this downturn. In this note, we compare two of the largest European integrated energy companies — BP Plc. (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) — based on their reserves, production, and operational performance to analyze which of the two companies have stronger fundamentals to survive the commodity trough. (Also read: BP Versus Shell – Which One Is A Better Bet For Shareholders?)
See Our Complete Analysis For BP Plc. Here
Proved Reserves
A company’s proved reserves entail the amount of resources that can be recovered from its deposits with a reasonable level of certainty. As of 31st December 2016, BP had proved reserves of 17.8 billion barrels of oil equivalent (BnBOE), of which 60% are liquid reserves, spread over North and Latin America, Europe, and Asia-Pacific. On the same date, Shell held proved reserves of 13.2 BnBOE, of which 47% are liquid reserves. While the two companies have reserves in identical geographies, BP holds 25% more proved reserves compared to Shell. Also, at the current production levels, BP has sufficient proved reserves to operate for about 15 years, while Shell has a reserve inventory that will last only 12 years, implying that the former can sustain its operations for longer than the latter.
However, when the reserves of the two companies are viewed in conjunction with their reserve replacement ratio (refer to the table below), we figure that Shell has been replacing its current reserves with new reserves at almost twice the speed at which BP is doing it. Thus, despite having lower reserves, Shell is making fast progress in expanding its reserve base to compete with its counterparts.
Upstream Production
Forced by the turbulence in the commodity markets, oil and gas companies have held back their production in the last two years in order to alleviate their losses in a low price environment. However, since integrated companies, such as BP and Shell, have the advantage of offsetting their upstream losses with their downstream operations, these companies have continued to grow their production, despite the declining commodity prices.
In the last couple of years, BP has increased its upstream output from 3.1 million boe per day (MBOED) in 2014 to 3.3 MBOED in 2016, growing at a compounded annual growth rate (CAGR) of 2%. In contrast, Shell’s production has jumped from 2.3 MBOED in 2014 to 3.0 MBOED last year, largely due to its acquisition of the BG Group in 2016. Since Shell has a higher production growth, we believe that the company will be in a better position to leverage the anticipated rebound in commodity prices over the next few quarters compared to BP.
EBITDA Margin
Depressed commodity prices have resulted in the deterioration of the profitability of most of the companies in the oil and gas industry. However, due to their large scale and integrated operations, BP and Shell have remained in the black for most part of the downturn. In fact, both the companies have managed to either sustain or even expand their upstream operating margins in the last two years, thanks to their increased operational efficiency and cost reduction measures. From the table below, we gauge that BP has operated at an average operating margin of 36% in the last three years, as opposed to Shell operating at margins of around 43% during the same period.
In terms of downstream operations too, both BP and Shell, have improved drastically over the last two years, as the drop in commodity prices has led to an expansion in the refining margins globally. While Shell’s downstream margins have averaged at around 4.8% for the last three years, BP’s margins have risen from 1.5% in 2014 to 4.5% in 2016, taking the three year average to 3.1%. Thus, we infer that Shell has a better operational efficiency compared to BP, and is better placed to benefit from the gradual recovery in commodity prices over time.
Thus, we conclude that while both the companies hold a robust portfolio of high quality assets, Shell has a superior operational performance compared to its rival, BP. Consequently, the company is better equipped to leverage the anticipated rebound in commodity prices over the long term.
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