This year, Royal Dutch Shell stock (RDS.A) has risen just 0.3%. It has not done as well as BP stock (BP), which has risen 1.6%. Furthermore, while Shell stock has fallen 2.7% month-to-date and 0.7% quarter-to-date, BP stock has risen 0.1% and 1.4% in those periods, respectively.
Meanwhile, most analysts love Shell stock, but seem divided on BP. Let’s look at why.
Most analysts prefer Shell stock over BP stock
Of the 12 analysts covering Shell, eight (67%) suggest “buy,” and four (33%) suggest “hold.” However, of the 12 analysts covering BP, only six (50%) suggest “buy,” five (42%) suggest “hold,” and one (8%) suggests “sell.” It looks like many are waiting and watching for BP.
Additionally, analysts’ mean target price of $77 for Shell implies a 32% upside. However, their $49 mean target price for BP implies a 28% upside.
Why analysts love Shell stock
Analysts have plenty of reasons to love Shell. The stock has been growing steadily since the company acquired BG Group. While the company’s financials were stretched during the acquisition, they have since recovered. The company’s total debt has declined, and its cash flow has improved, all amid volatile business conditions.
In this year’s first nine months, Shell’s net cash outflow toward debt repayments was about $9 billion. The company’s total debt-to-capital ratio improved to 31.5% by the end of the period. Also, Shell’s operating cash flow of $31.9 billion sufficiently covered its crucial capex outflow of $16.3 billion and dividend outflow of $11.5 billion. At the end of September, Shell had an operating cash flow surplus of $4.2 billion, or 13% of its cash flow from operations. These figures suggest the company was able to fulfill its dividend and capex obligations despite oil price volatility.
Additionally, Shell’s cash outflow on buybacks was $7.3 billion in this year’s first nine months. The company used the surplus from its operating cash flow and drew from its cash reserves to repay debt and buy back shares, reducing its cash balance from $26.7 billion to $15.4 billion over the nine months. Given its reduced cash reserves, it seems prudent that the company plans to slow down its debt reduction and share buybacks. Furthermore, the company’s robust upstream portfolio could bring growth in the years to come.
Why analysts are divided on BP stock
Although BP has high growth prospects, that promise comes with high debt. BP’s total-debt-to-capital ratio (including lease liabilities) was 43.0% at the end of September, higher than Shell’s.
Plus, in this year’s first nine months, BP’s operating cash flow of $18.2 billion was insufficient to cover its capex of $15.0 billion and dividend outflow of $4.9 billion. It fell short by about $1.7 billion, or 9% of its cash flow from operations.
Therefore, BP’s balance sheet and cash flow are looking a bit stretched. Although the company is growing with upstream project start-ups and ramp-ups, analysts are likely waiting for some concrete financial improvement.