BP and Shell have both reported their third quarter results and provided insight into how the oil majors are performing as oil prices fall back from the $100+ levels seen after the start of the war in Ukraine.
By all accounts the oil majors had a successful third quarter with profit rising compared to last year. BP’s underlying profit rose to $8bn while Shell’s Adjusted Earnings jumped to $9.5bn.
There was a slight deterioration compared to the second quarter for BP who reported Q2 underlying profit of $8.5bn. Shell had reported $11.5bn earnings in Q2.
As we move towards the end of the year, BP and Shell are trading at their highest levels of 2022 as oil prices rally on hopes of a Chinese economic reopening and end of their zero Covid policy.
Despite BP and Shell shares moving in tandem for most of the year, there a striking differences in the underlying valuation of the shares.
BP Shares Valuation
BP shares trade at 8.7x historical earnings and just 3.8x forecasted earnings. This is of course reliant on BP meeting analyst earnings estimates but these multiples suggest deep value.
From an income perspective, BP has a current yield of 3.2%. This isn’t particularly attractive based on BP’s historical yield an is broadly inline with the FTSE 100 average. That said, the Dividend Cover is 3 so there’s plenty for space to increase dividends and BP are also embarking on a significant buyback programme.
Shell shares
With the Shell share price at 2,530p, the company has a notably higher price-to-earnings ration at 13.7x. This may reflect a premium the market has given to Shell due their exposure to gas and effort in reducing their carbon footprint – something BP is also making significant steps in doing as well.
Nonetheless, Shell does trade at a much higher valuation than BP and also has a lower yield at 2.3%, although Shell has recently hike the dividend. So with these basic valuation metrics, Shell does appear expensive compared to BP.
BP generated a similar amount of cash from operations ($8.2bn) as Shell ($12.5bn) in the third quarter, but did this from around half of the revenue of Shell (BP revenue $57.8bn; Shell $98.7bn). This would suggest BP was more efficient than Shell at generating cash – in the last quarter, at least.
However, BP revenue was more heavily hit during the summer by lower oil prices which could be a cause for concern among investors when extrapolating out the potential impact into 2023. Indeed, Shell’s revenue fell by only 5% from Q2 to Q3 while BP’s sank 17%.