Oil prices and stocks have taken a hit in recent months, but one analyst predicts a rebound in 2024. Peter Low of Redburn Atlantic highlights three companies, Shell, BP, and Exxon Mobil, as potential winners that could deliver a 20% or higher return for shareholders.
The Outlook for Shell, BP, and Exxon Mobil
Low had already rated Shell as a Buy, but he recently upgraded his ratings for Exxon and BP to Buy from Neutral. Despite weak global demand and strong production beyond OPEC and its allies, Low anticipates a turnaround in consumption that will outpace output in the first half of the year. This could push per-barrel prices from their current mid-$70s range to the mid-$80s.
An Opportunity for Undervalued Stocks
With many oil majors trading at a 30% discount to their long-run valuations, Low sees an opportunity. He believes the combination of attractive valuations and potential commodity price upside prompts a more positive outlook for the sector.
Why Exxon Stands Out
Although Exxon experienced a 9% drop in stock value in 2023 following significant gains in the previous two years, Low considers it to have the best growth prospects among the major oil companies. Notably, Exxon has made strategic investments in the Permian Basin through its acquisition of Pioneer Natural Resources. Additionally, the company is heavily investing in offshore drilling, including a major project off Guyana.
Compared to its peers, Exxon boasts an impressive 12.6 years’ worth of reserves versus the industry average of 10.1 years, according to Low. While it may trade at a richer valuation of 10.9 times per-share earnings expected over the next year, considering its free cash flow actually makes the stock appear less expensive.
Exxon’s free cash flow yield, which measures the cash generated relative to its market capitalization, excluding long-term capital expenses, stands at an average 9.6%, similar to other major oil companies.
Low’s analysis leads him to conclude that Exxon, Shell, and BP all have considerable potential for outperformance in the coming year. Each company offers unique advantages that could help them weather the current oil industry challenges and deliver strong returns for their shareholders.
Oil Companies and Free Cash Flow
Free cash flow has become a crucial metric for oil companies as it indicates their ability to pay dividends and repurchase stock. Exxon, for instance, is expected to buy back $20 billion worth of stock annually once it completes the Pioneer acquisition. According to Low, this number could grow in the future.
Low believes that Exxon’s stock could rise to $119 from its current value of $99.50. The attractiveness of this potential 20% share price gain is further enhanced by the stock’s 3.8% dividend yield.
European Oil Companies vs. American Majors
European oil companies, including Shell, have been trading at lower valuations compared to their American counterparts in terms of price-to-earnings ratio. This disparity exists primarily because European companies like BP and TotalEnergies have made larger investments in renewable energy, resulting in lower valuations. Renewable energy is generally valued at lower multiples than the oil business.
However, in 2023, there was a shift back toward oil, which benefited the European stocks and allowed them to surpass the U.S. majors. Despite Shell’s strong performance last year, Low believes there is still more potential for growth.
Shell’s Growth Potential and Dividend Yield
Low writes that although there may be fewer obvious catalysts in 2024 compared to the previous year, Shell’s valuation remains attractive. He believes the company is well-positioned to return cash to its shareholders. Low anticipates that Shell’s shares could rise to £31 ($39.36) from their current value of £24.81. Additionally, Shell offers a dividend yield of 4.2%.
BP’s CEO Situation and Potential Positive Catalyst
Since Bernard Looney stepped down as CEO of BP last year due to an investigation into his relationships with employees, the company has been operating without a permanent CEO. The appointment of a new CEO carries both risks and the potential for stock gains.
Low suggests that considering the board’s support for the current strategy, a new CEO would likely not pursue a radically different approach. This expectation of continuity could bring certainty and remove speculation, serving as a positive catalyst. Low estimates that BP’s shares could rise to £5.90 from their current value of £4.59. The dividend yield stands at 4.8%.