Shell and BP shares: what the City really thinks

With oil majors still in recovery mode, these experts just updated their expectations.

It's been almost a year since pandemic-hit Royal Dutch Shell (LSE:RDSB) dealt a severe blow to income investors and pension funds by cutting its dividend for the first time since the war.

Last April's 66% reduction took the first-quarter payment down to 16 cents per share, although by late October the oil giant's prodigious ability to generate cash had already resulted in the resumption of its progressive dividend policy.

Now, a City bank has made Royal Dutch Shell its top pick in the European oil sector by modelling a 2022 restart to share buybacks that implies a total shareholder yield of 10.7%.

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Deutsche Bank's upbeat assessment also forecasts 37% upside for Shell's shares, whereas its research analyst James Hubbard sees higher risk and much less momentum at BP (LSE:BP.).

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He said in a note published today: “When Shell cut its dividend in 2020 it was a shock for many, but the silver lining is that it saves Shell about $10 billion per annum.

“This contributes to our forecast for its net debt to swiftly fall to under management's target of $65 billion before the end of 2021 and sets up 2022 to potentially see the restart of a material share buyback.”

Royal Dutch Shell B shares, which for tax reasons are more commonly traded in London than the A version, were today 6.2p higher at 1,297p. This compares with a pandemic low of 866p in late October and more than 1,500p seen last month.

More positives for Shell

Hubbard believes there are other positives beyond the buyback catalyst, including the scale of the energy giant's LNG business (liquified Natural Gas) which ranks second and first respectively in terms of liquefaction capacity and in volumes sold.

Natural gas emits between 45% and 55% fewer greenhouse gas emissions and less than one-tenth of the air pollutants than coal when used to generate electricity.

Using Deutsche Bank's oil carbon scorecard, Shell's decarbonisation strategy places the company fourth out of eight European-listed names and two spots ahead of BP.

Shell's A shares currently trade on a forecast multiple of 8.5 times 2021 earnings, which Deutsche notes is a 35% discount versus the EU oil sector's five-year average. The dividend yield of 3.6% is less impressive versus a sector average of 5.4%, but this jumps to the top of the pile on the assumption that buybacks will restart in earnest next year.

The bank's new 1,937p target for Shell A is based on Brent oil averaging $65.4 a barrel over the next two years and implies a price/earnings multiple of 11.5 times, which is still an 11% discount to the sector's five-year average.

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On BP, Deutsche has a price target of 313p and ‘hold’ recommendation. The bank said this partly reflected risks attached to ambitious decarbonisation plans outlined in September.

Today's note warns: “Aggressive renewables investments come with risks of potential value destruction via paying what may turn out to be 'full' prices for potentially relatively late entry to some projects.” BP shares were today 1.85p higher at 293.6p.