BP and Shell: which one is the top pick?

Shell has been named one of Europe’s Big Oil top picks after a City bank said that resilience of cash returns will carry an even greater premium in the forthcoming results season.

Bank of America’s updated estimates for the industry’s second-quarter earnings point to more misses than beats, with Shell (LSE:SHEL) and France’s TotalEnergies SE (EURONEXT:TTE) being rare exceptions.

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It continues to have a price target of 3,400p on Shell, representing an upside of a fifth, but with a “neutral” recommendation and 500p estimate on the under-pressure shares of rival BP (LSE:BP.).

Rangebound oil and gas prices, little organic volume growth and weaker refining margins mean the bank expects aggregate cash flows 20% lower quarter-on-quarter.

Against the backdrop of another quarter of free cash flow burn once shareholder returns are taken into account, the bank said superior resilience will be at a premium - whether that’s through stronger balance sheets or lower oil price breakeven points.

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Shell reports results on 1 August, when the bank expects cash flow from operations (CFFO) of $13 billion that should more than cover $6 billion of capital expenditure, $2 billion of dividend payments as well as $3.5 billion buybacks in the quarter.

Net debt is set to continue its decline to below $40 billion, meaning there’s headroom for positive commentary about future buyback run rates. The forecast dividend of 34.4 US cents a share is 4% higher than a year earlier.

Last year’s second-quarter award increased by 15% when chief executive Wael Sawan unveiled his pledge to focus on capital and spending discipline.

On paper, BP competes with TTE's and Shell's 40% CFFO payout and 10% cash return yields.

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However, the bank said: “We expect BP's half-year free cash flow burn to turn attention to its weaker balance sheet.

“While we do not expect BP to cut its buyback commitment this soon after bumping up its payout in February, we believe it becomes unsustainable assuming $80 a barrel next year.”

BP last increased its dividend a year ago, but given its lower share count the bank expects growth of about 10% to eight cents a share on 30 July.

The dividend outlook helped underpin the optimism of Morgan Stanley until last week’s trading statement took “the wind out of the sails of this thesis”.

BP’s guidance triggered a big fall for shares as it flagged one-off headwinds including weak gas price realisations, significantly lower realised refining margins and refinery impairments.

The update prompted Morgan Stanley to return its recommendation to Equal Weight and cut its price target by 17% to 540p. The bank said: “BP's disappointing trading update follows several quarters of weak earnings, putting 2025 guidance at risk.”