While analysts are cautiously optimistic about the share prices of some oil companies, there is a sense that low oil prices could persist for some time. So, how will BP and Shell’s share prices fare for the rest of 2020?
Former British Prime Minister Harold Wilson once said that a week is a long time in politics. The events of this past week have proven that this adage can also be applied to oil share prices, the expectations for which have swiftly fallen since the start of the year.
BP [BP], whose share price was trading close to 500p per share at the start of 2020, dropped below 234p in mid-March, before rallying to close at 344p by the end of the month. Royal Dutch Shell’s [RDSB] share price followed a similar trajectory. The stock had started the year at around the 2,200p mark but ended March at 1,359p.
The decline in BP and Shell’s share prices, and oil majors’ at large, is being led by the fall in oil prices with WTI Crude going from above $63 a barrel at the start of the year to just $20 a barrel by the end of March — its worst first quarter on record.
“If the first quarter was a bloodbath, the next quarter will be the Valley of Death,” Michael Lynch, president of Strategic Energy & Economic Research, recently told MarketWatch.
“If the first quarter was a bloodbath, the next quarter will be the Valley of Death” - Michael Lynch, president of Strategic Energy & Economic Research
Oil majors hit with sell ratings
Earlier this week, Shell joined its French peer Total [TTA] in suspending its share buyback programme as part of a wider effort to shore up capital against the oil market turmoil. Shell said its divestment programme to sell more than $10bn in assets remains on track.
BP is expected to report EPS of $0.48 at its Q1 earnings update — expected on 28 April —, down 31.43% from $0.70 reported in the same quarter last year, according to Zacks Equity Research. The firm’s consensus estimates suggest analysts are expecting earnings of $1.04 per share and revenue of $220.89bn in 2020, which would represent declines of 64.75% and 21.84% respectively from last year.
Zacks consensus rating has BP pegged as a strong sell. However, Steve Reitmeister, CEO of the Stock New Network, believes BP is a good long-term play on the basis that it has shown better earnings results than most of its peers. The oil giant’s operational strength, he considers, gives investors more confidence that it will regain its footing earlier than most. While acknowledging that BP is heavily exposed to the European economy, Reitmeister also noted that it offers the biggest dividend yield — north of 10%.
Conversely, Shell is projected to report earnings of $0.54 per share in its next earnings release at the end of April — which would represent a decline of just over 27% from the previous quarter — according to Zacks.
Meanwhile, the firm estimates earnings of $1.12 per share and revenue of $248.55bn for the year, which would represent changes of -72.28% and -29.41% respectively from the prior year. It has the stock down as a sell.
|PE ratio (TTM)||17.19||7.32|
|Quarterly Revenue Growth (YoY)||-6.40%||-17.80%|
BP & Shell share price vitals, Yahoo Finance, 2 April 2020
Is oil headed for an apocalyptic April?
Despite the gloom surrounding the sector, Paul Sankey, managing director at Mizuho Securities, recommends investors start building positions in quality oil companies with good management and higher levels of debt, adding the caveat, only “if the quality is good and the company is able to service its debt”, according to Yahoo Finance.
Of course, the spat between Russia and Saudi Arabia has not helped oil stocks. Any hopes that the recent G20 leaders' videoconference summit might produce a resolution were dashed when the post-summit statement made no mention of oil.
The dispute centres on Russia’s refusal to reduce production as part of OPEC’s efforts to prop up prices. This prompted Saudi Arabia to raise production markedly, while cutting the official selling price for crude exports.
Storage is also a growing challenge. While diesel, fuel oil and crude oil can be stored for years without degradation, the additives used in petrol means it has a much shorter shelf life — typically around six months.
As the first quarter of this year came to a close this week, reports abound that oil prices have just seen their worst quarter on record. Barclays expects WTI Crude to average $28 a barrel this year and Goldman Sachs has previously warned that it could fall to $20 — a view shared by ING strategists Warren Patterson and Wenyu Yao.
Furthermore, Goldman Sachs recently indicated that global daily oil demand could fall by more than 18.7 million barrels next month, according to The Wall Street Journal.
Number of barrels daily oil demand could fall by
Meanwhile, one of the world’s largest independent oil trading companies, Vitol, predicts a fall of 20% — equivalent to dropping 20 million barrels a day — in global oil demand over the coming weeks as coronavirus wreaks further havoc on economic activity.