A lot has changed over the past year and a half. Oil demand has spiked and supply is struggling to catch up. The war in Ukraine has only added fuel to the fire, igniting what has to be one of the biggest ever U-turns in global energy policy.
Only a couple of months ago, policymakers were setting out plans to reduce global hydrocarbon production for good, but now they’re rushing to drive up supply. US president Joe Biden has recently reversed his decision to ban drilling for oil and gas on federal land while here in the UK, the government’s flagship energy policy contains new targets for drilling in the North Sea.
It is going to take months if not years for supply to match the world’s seemingly insatiable demand for hydrocarbons. Even major swing producers – namely the Opec cartel – are struggling to ramp up output despite higher production targets.
The supply and demand imbalance has sent prices surging
Global oil and gas markets have responded the only way free markets know how when demand outweighs supply – prices have spiked.
The Brent crude oil benchmark has jumped by 70% in just a few months, returning to levels not seen since 2014. Meanwhile, natural gas prices in the US are up by nearly 200% in the past 12 months (while in the UK and European markets prices have risen by 230% and 340% respectively – gas is not a global market).
In this environment it is not surprising that BP and its Big Oil peers are minting cash. Last year, the firm announced its highest profit in eight years and Factset broker projections are currently estimating a 42% jump in income for 2022. Shell’s (LSE: SHEL) earnings look likely to rise by about a third this year.
However, despite BP’s outstanding fundamentals, the stock’s performance on any timeline longer than 12 months leaves a lot to be desired. The shares have charged higher by 37% on a total return basis over the past year, but over the past decade, they’ve yielded a miserly total return of 3.9% per annum compared to 7.1% for the FTSE All-Share.
Investors should not overlook BP’s progress
BP is not the organisation it was the last time the price of Brent crude was above $100 a barrel. Its return on average capital employed (ROACE) – the company’s preferred measure of operating performance – hit 12.1% in 2021 compared to 9.9% eight years ago.
The company has also moved on from the 2010 Gulf of Mexico disaster, reduced its debt and outlined a plan to reduce its exposure to oil and gas by boosting renewable energy output.
Still, at face value, the stock does not seem to reflect the company’s improving trading performance. Shares in BP are selling at a forward price-to-earnings ratio (P/E) of 7.2 while shares in Shell command a valuation of just 6.5.
However, these figures need to be put into perspective. Both companies are generating bumper profits, and there is no guarantee this will last. From a different perspective, BP is trading at a trailing 12-month p/e of 14.1, roughly inline with its five-year average. Shell’s historical valuation is similar.
They’re making money today, but investors shouldn’t forget the fact that these two businesses jointly announced some of the largest losses in British corporate history in 2020 after the price of oil briefly turned negative. And these hefty losses forced both companies to reduce their shareholder payouts, underlining the fragile nature of oil company dividends.
A constant struggle to maintain output and maintain profits
Oil and gas producers face a constant struggle to maintain production. An oil well requires continual investment to maintain production, and sooner or later, the well will run dry. BP and its peers are always looking for new prospects and this costs huge amounts of money.
Last year, BP’s capital spending totalled $13bn and in 2020, the company had to spend $14bn, far more than the earnings generated from selling oil and gas in the first place. These figures illustrate the biggest issue these operators face: the need to keep investing and keep spending even if oil prices collapse.
BP and its peers are also having to invest large sums of money in developing green energy projects. These projects are not going to produce returns immediately, and could prove to be a drag on profits for years to come, only adding to the uncertainty for these enterprises.
As such, while shares in Shell and BP do look cheap at first glance, investors need to carefully consider where these businesses are heading and the challenges they may face going forward.
Windfall oil profits may only be temporary, while capital spending obligations are forever. These businesses might have a central role to play in the global economy, but that does not mean they should have a central role in investors’ portfolios.
- “Market capitalization of listed domestic companies (current US$)”. The World Bank.
- “All of the World’s Stock Exchanges by Size”. February 16, 2016. Retrieved September 29, 2016.
- “countries with largest stock markets”. statista.
- Is Asia the next financial center of the world?”. CNBC.com. Retrieved March 11, 2017.
- “IBM Investor relations – FAQ | On what stock exchanges is IBM listed ?”. IBM.
- “UBS, Goldman wean away trade from NYSE, Nasdaq”. The Economic Times. December 6, 2006.
- Dark Pools Take Larger Share of Trades Amid SEC Scrutiny”. Bloomberg News.
- “Financial regulators probe dark pools”. Financial Times. September 15, 2014.
- “What’s the Difference Between Direct and Indirect Shares?”. InvestorJunkie. August 14, 2018.
- Statistical Abstract of the United States: 1995 (Report). United States Census Bureau. September 1995. p. 513. Retrieved December 17, 2015.
- Statistical Abstract of the United States: 2012 (Report). United States Census Bureau. August 2011. p. 730. Retrieved December 17, 2015.
- Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances (PDF) (Report). Federal Reserve Board of Governors. June 2012. p. 24.
- Social Interaction and Stock-Market Participation”. The Journal of Finance. 59: 137–163. doi:10.1111/j.1540-6261.2004.00629.x.
- World Federation of Exchanges Monthly YTD Data”. World-exchanges.org. Archived from the original on June 11, 2011. Retrieved May 31, 2011.
- Equity market Size relative to bond markets and bank assets”. eurocapitalmarkets.org. September 27, 2010. Retrieved August 14, 2015.
- Risk management with interdependent choice” (PDF). Oxford Review of Economic Policy. 15 (3): 52–62.
- Macroeconomics and Market Power: Context, Implications, and Open Questions”. Journal of Economic Perspectives. 33 (3): 23–43. doi:10.1257/jep.33.3.23. S2CID 201326865.
- Social Security (United States)#Public economics; see that page’s history for attribution
- Americans with a college degree 1940-2018, by gender”.
- David Fabian (February 9, 2014).
- Why The Market Doesn’t Care Where You Think It Should Go”. Seeki
- More Remote Working Apps:
- https://quintexcapital.com/?ref=arminham Quintex Capital
- https://www.genesis-mining.com/a/2535466 Genesis Mining
- http://www.bevtraders.com/?ref=arminham BevTraders
- https://jvz8.com/c/202927/369164 prime stocks
- https://jvz3.com/c/202927/361015 content gorilla
- https://jvz8.com/c/202927/366443 stock rush
- https://jvz1.com/c/202927/373449 forrk
- https://jvz3.com/c/202927/194909 keysearch
- https://jvz4.com/c/202927/296191 gluten free
- https://jvz1.com/c/202927/286851 diet fitness diabetes
- https://jvz8.com/c/202927/213027 writing job
- https://jvz6.com/c/202927/108695 postradamus
- https://jvz1.com/c/202927/372094 stoodaio
- https://jvz4.com/c/202927/358049 profile mate
- https://jvz6.com/c/202927/279944 senuke
- https://jvz8.com/c/202927/54245 asin
- https://jvz8.com/c/202927/370227 appimize
- https://jvz8.com/c/202927/376524 super backdrop
- https://jvz6.com/c/202927/302715 audiencetoolkit
- https://jvz1.com/c/202927/375487 4brandcommercial
- https://jvz2.com/c/202927/375358 talkingfaces
- https://jvz6.com/c/202927/375706 socifeed
- https://jvz2.com/c/202927/184902 gaming jobs
- https://jvz6.com/c/202927/88118 backlink indexer https://jvz1.com/c/202927/376361 powrsuite
- https://jvz3.com/c/202927/370472 tubeserp
- https://jvz4.com/c/202927/343405 PR Rage
- https://jvz6.com/c/202927/371547 design beast
- https://jvz3.com/c/202927/376879 commission smasher
- https://jvz2.com/c/202927/376925 MT4Code System
- https://jvz6.com/c/202927/375959 viral dash
- https://jvz1.com/c/202927/376527 coursova
- https://jvz4.com/c/202927/144349 fanpage
- https://jvz1.com/c/202927/376877 forex expert
- https://jvz6.com/c/202927/374258 appointomatic
- https://jvz2.com/c/202927/377003 woocommerce
- https://jvz6.com/c/202927/377005 domainname
- https://jvz8.com/c/202927/376842 maxslides
- https://jvz8.com/c/202927/376381 ada leadz
- https://jvz2.com/c/202927/333637 eyeslick
- https://jvzcom/c/202927/376986 creaitecontentcreator
- https://jvz4.com/c/202927/376095 vidcentric
- https://jvz1.com/c/202927/374965 studioninja
- https://jvz6.com/c/202927/374934 marketingblocks https://jvz3.com/c/202927/372682 clipsreel
- https://jvz2.com/c/202927/372916 VideoEnginePro
- https://jvz1.com/c/202927/144577 BarclaysForexExpert
- https://jvz8.com/c/202927/370806 Clientfinda
- https://jvz3.com/c/202927/375550 Talkingfaces
- https://jvz1.com/c/202927/370769 IMSyndicator
- https://jvz6.com/c/202927/283867 SqribbleEbook
- https://jvz8.com/c/202927/376524 superbackdrop
- https://jvz8.com/c/202927/376849 VirtualReel
- https://jvz2.com/c/202927/369837 MarketPresso
- https://jvz1.com/c/202927/342854 voiceBuddy
- https://jvz6.com/c/202927/377211 tubeTargeter
- https://jvz6.com/c/202927/377557 InstantWebsiteBundle
- https://jvz6.com/c/202927/368736 soronity
- https://jvz2.com/c/202927/337292 DFY Suite 3.0 Agency+ information
- https://jvz8.com/c/202927/291061 VideoRobot Enterprise
- https://jvz8.com/c/202927/327447 Klippyo Kreators
- https://jvz8.com/c/202927/324615 ChatterPal Commercial
- https://jvz8.com/c/202927/299907 WP GDPR Fix Elite Unltd Sites
- https://jvz8.com/c/202927/328172 EngagerMate
- https://jvz3.com/c/202927/342585 VidSnatcher Commercial
- https://jvz3.com/c/202927/292919 myMailIt
- https://jvz3.com/c/202927/320972 Storymate Luxury Edition
- https://jvz2.com/c/202927/320466 iTraffic X – Platinum Edition
- https://jvz2.com/c/202927/330783 Content Gorilla One-time
- https://jvz2.com/c/202927/301402 Push Button Traffic 3.0 – Brand New
- https://jvz2.com/c/202927/321987 SociCake Commercial https://jvz2.com/c/202927/289944 The Internet Marketing
- https://jvz2.com/c/202927/297271 Designa Suite License
- https://jvz2.com/c/202927/310335 XFUNNELS FE Commercial
- https://jvz2.com/c/202927/291955 ShopABot
- https://jvz2.com/c/202927/312692 Inboxr
- https://jvz2.com/c/202927/343635 MediaCloudPro 2.0 – Agency
- https://jvz2.com/c/202927/353558 MyTrafficJacker 2.0 Pro+
- https://jvz2.com/c/202927/365061 AIWA Commercial
- https://jvz2.com/c/202927/357201 Toon Video Maker Premium
- https://jvz2.com/c/202927/351754 Steven Alvey’s Signature Series
- https://jvz2.com/c/202927/344541 Fade To Black
- https://jvz2.com/c/202927/290487 Adsense Machine
- https://jvz2.com/c/202927/315596 Diddly Pay’s DLCM DFY Club
- https://jvz2.com/c/202927/355249 CourseReel Professional
- https://jvz2.com/c/202927/309649 SociJam System
- https://jvz2.com/c/202927/263380 360Apps Certification
- https://jvz2.com/c/202927/359468 LocalAgencyBox
- https://jvz2.com/c/202927/377557 Instant Website Bundle
- https://jvz2.com/c/202927/377194 GMB Magic Content
- https://jvz2.com/c/202927/376962 PlayerNeos VR