The Independent: Hold Shell but BP is oil sector pick
Investment Column Edited by Stephen Foley
14 April 2004
The valuation gap between the haves and the have-not of the FTSE 100 oil and gas sector has never been wider.
The haves - BP, the UK's largest company, and BG Group, the exploration and production rump of the old British Gas - are raking in cash and pumping up output. The have-not, luckless Shell, is struggling to cope with the debacle of its overstated reserves, which has caused a legal and regulatory firefight and brought opprobrium on the company's complicated management structure. Shell shares trade on 7 times post-tax cash flows compared with almost 9.6 times at BP and 10.3 times at BG.
The key question in this sector is if and when Shell will be a tempting investment again. We advised at Christmas that disappointed Shell shareholders should at least hang on and promised to revisit the stock after its 2003 results. Since then, of course, it has wiped out 3.9 billion barrels of its stated reserves and fired its chairman. The fall guys having fallen and some, albeit limited, boardroom reforms having been set in motion, sentiment at least should improve. On the financial side, though, we are left with a business which will struggle to grow production in the coming years. Contrast that with more than 7 per cent a year at BP (in part thanks to its risk taking in Russia) and a promise of 16 per cent a year at BG, and it is difficult to quibble with the trio's respective share prices.
With fuel prices, oil in particular, likely to stay high for the next few years amid improving economic growth, instability in the Middle East and tightish controls by the Opec cartel, it is BP - which is most exposed to the oil price - which is the pick of the sector. Its shares will yield 3 per cent this year and it has promised further dividend increases. BG Group, expanding in Egypt and Kazakhstan, is the potential takeover candidate and the growth story of the three, but its shares, which hit a new high yesterday, are vulnerable to any trading hiccups and are only a hold. Shell, too, is worth holding for recovery.