Why Big Oil should be on your radar: BP and Shell evaluate their futures

BP has hit the headlines thanks to its former boss’ complicated love life. But should the oil giant now be on your radar for reasons other than Bernard Looney resigning over undisclosed romantic relationships with co-workers?

I would suggest so, and that they should also take a closer look at Shell, that other FTSE 100 ‘Big Oil’ name.

The Looney saga has put BP in the spotlight.

Amid a wave of mergers in the US, there is even talk that BP, which has capital of £85.35 billion, could be a target, with its shares lagging behind those of Shell, Chevron and Exxon Mobil. .

Exxon – which is about to buy Texas operator Pioneer for $60 billion – and other titans shifted their focus more toward oil and gas in response to Russia’s invasion of Ukraine.

Now some believe BP’s next chief executive must decide whether to make a similar change or continue to lead the transition to biogas, solar, wind and other renewable energy sources.

This week, Murray Auchincloss, BP’s acting boss, insisted that “one person leaving does not change the strategy.” But this attempt to clarify the outlook may not quell the rumors about the offer.

As Quilter Cheviot analyst Jamie Maddock points out, everyone in Big Oil is being forced to reassess the future of their businesses, amid questions about net-zero targets and Paris climate agreement commitments. Big Oil apparently remains committed to these promises, but the speed of implementation may be slowing. Maddock says: “With concerns around national energy security and a continued reliance on fossil fuels, some have watered down their commitments on the transition.”

Speculation about the direction of BP, Shell and the rest comes against the backdrop of forecasts of further increases in the price of oil.

This despite Brent crude, the global benchmark, reversing some of this year’s gains.

The price jumped to $94 a barrel in September as a result of cuts by OPEC members. Oil demand will hit a record 102.2 million barrels this year, driven by factors such as the return of air travel during the summer holidays and a rebound in petrochemical manufacturing in China.

JP Morgan analyst Christyan Malek even forecasts Brent could rise to $150 a barrel by 2026. He argues that “the institutional and political pressures driving an accelerated transition away from hydrocarbons” make it difficult to justify the long-term spending. term in exploration. or production to increase supply.

The conviction that interest rates will remain higher for longer – which has spread apprehension in stock markets this week – also makes such projects cost-prohibitive.

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You may doubt that Brent crude can scale such heights. But it’s still worth considering betting on BP and Shell or at least checking whether your funds and trusts own these stocks (this information can be found online in their fact sheets).

Charles Luke, manager of the Murray Income fund, says: “We own BP because we believe it is a leader in the energy transition, with a good focus on profitably increasing its exposure to renewables, as well as benefiting from its legacy hydrocarbons that should remain profitable even with a low oil price.’

Maddock also notes that the stock looks cheap.

“Despite the turmoil, and despite some recent volatility in earnings, BP remains a well-capitalized company, with a strong balance sheet and low debt levels,” he says.

He believes BP is more ambitious than its peers in the renewable energy sector, which could make the group a long-term winner.

Before Looney’s love affairs made headlines, he was famous for his outspoken statements, such as comparing BP to “an ATM” in the third quarter of 2021, when the price of oil averaged $73 a barrel.

This may have been an exaggeration. However, under his aegis, payouts to investors have been plentiful.

The company’s dividend yield is 4.3 percent. It is also returning cash to shareholders through a $1.5 billion share buyback plan.

Shell’s dividend yield is 3.7 percent. There is also a $5 billion buyback program, and the view is that both companies can afford those rewards even if the oil price falls.

I intend to invest some money in these big British Big Oil names. But I also tend to take advantage of the falling price of the iShares Global Clean Energy ETF, thus hedging my bets in this sector.

The controversial shift from hydrocarbons to renewable energies risks obscuring some essential facts. As another former BP boss, Bob Dudley, said this week: “We need things that provide heat, light and mobility, whatever the forms of energy, we have to do it.”