Shell and BP are currently enjoying the highest oil prices in years, with Brent Crude currently trading at slightly under $120 per barrel. China has reopened after its several weeks of Covid-19 lockdown, leading to a boost in demand, and the war in Russia continues to put a strain on oil reserves, despite the recent decision by OPEC to boost output.
Shell and BP have both withdrawn from Russia and suffered hits to their cash reserves, and the recent windfall tax reveal is set to alleviate some cost of living pressure from struggling UK families with a slight dent in both companies’ soaring profits.
The double-barrelled blow of their exit from Russia and the windfall tax might muddy the waters for investors who may be interested in the prospects for both companies going forward, so what is the complete story?
Financial Results
BP reported a loss of $20.4 billion in Q1 2022 on its withdrawal from its 19.75% stake in Russian energy group Rosneft, striking a considerable blow to the company’s financial statement.
However, high levels of oil and gas trading boosted its underlying replacement cost profit to $6.2 billion from $4.1 billion last year.
The firm paid out a dividend of 5.4c per ordinary share, which was flat against its Q4 2021 payment.
Shell saw $3.8 billion in post-tax charges linked to its phased withdrawal from Russian operations, including its involvement in Sakhalin-2 and the Nord Stream 2 projects.
Shell reported Q1 2022 adjusted earnings of $9.1 billion against $6.3 billion quarter-on-quarter, with higher oil prices and lower operating expenses and tax contributing to its growth.
The company also paid out a dividend of 25c per share from 24c per share in Q4 2021.
Windfall Tax
The windfall tax label caused a rather intense storm to rain down on Chancellor Rishi Sunak when the term was being discussed in earlier months, so the solution to crippling energy costs was instead called a “targeted profit levy.”
The tax set a 25% rate on top of the 40% which Shell and BP are supposed to pay each year, with a sunset clause for the tax to be withdrawn either when oil prices return to their previous lower levels or by 2025.
This would likely have set off a chain reaction of panic in the stocks the second it was released; however, there is a caveat, in the form of an intense “super-deduction” investment relief of 80%.
Sunak added an incentive for companies to drill for oil locally in a move to make up for the loss of Russian reserves, and jacked up the tax relief for every £1 invested in the UK from 46p to 91p.
Unsurprisingly, this allowance meant that the stock market hardly noted the “targeted profit levy”, and it’s not likely to cause any sort of major detriment to the profits for BP or Shell anytime in the near future.
Valuations
The BP share price has risen 33.1% year-to-date, as the price rose higher on swelling oil values.
The stock has a respectable dividend cover of 3, which is set to leave it more than capable of paying out its dividend despite conditions of market volatility.
Meanwhile, the shares have a strong dividend yield of 4%, marking them out as a high-paying investment.
BP boasts a PE ratio of 8.5, alongside a forward PE ratio of 4.9, indicating decent growth over the coming months as the price of oil looks set to climb and demand primed to spike as production increases on the back of countries reopening after Covid-19 and cold weather primed to send demand through the roof as winter months approach.
The Shell share price has soared year-to-date, with a 48.3% spike over the period.
The company has a weaker dividend cover than its competitor, with a cover of 2.3 and a dividend yield of 3%.
Meanwhile, Shell has a PE ratio of 14.5 and a forward PE ratio of 6, suggesting some impressive earnings growth over the coming period.
At current historical PE multiples, BP is currently offering better value than Shell, and will pay investors a higher dividend. However, Shell’s exposure to cleaner gas supplies may mean they are able to deliver greater shareholder returns as the planet’s energy demands evolve.