BP Stock – Investors Are Skeptical About European Oil Giants’ Push to Decarbonize, Analyst Says
The major European energy companies trade for a “historically wide” discount to their U.S. peers as investors take a cautious view of the Europeans’ decarbonization strategies, says Morgan Stanley analyst Martijn Rats.
The European majors,
Royal Dutch Shell
(RDS.A and RDS.B), and
(TOT), trade for half the cash-flow multiples and close to double the free-cash flow yields of the U.S. majors,
(CVX), Rats wrote on Wednesday in a note to clients.
The Europeans have a projected 12-month free cash-flow yield of 12.6%, against 7.3% for the U.S. majors.
“European majors have usually been valued at a discount, but the gap is historically wide at the moment,” Rats noted. So far this year, Chevron and Exxon stocks are up around 30% while the European energy stocks have risen an average of about 14%.
In early trading on Thursday, Chevron shares were at $101.78, down 95 cents; Exxon was at $55.60, off 40 cents; BP was at $24.75, down 21 cents, and Royal Dutch A shares were at $38.21, down 43 cents.
“European majors are embarking on ambitious strategies to decarbonize. That involves investments in a range of activities including offshore wind, solar, hydrogen, EV charging, etc.,” Rats wrote. “This drives up capex, whilst the returns on that capex are still uncertain. In contrast, U.S. oil majors are still mostly focused on their core oil and gas businesses.”
“From investor conversations, it is clear that the U.S. oil majors are still seen as a play on recovering oil and gas prices.” The European investment story is more complicated, he noted, involving “a multitude of end-markets, projects and business models.”
“In our experience, investors are finding it harder to access this outlook, and there is likely some discount for this added complexity,” Rats wrote.
BP is leading the transition as the company is aiming to cut its oil and gas production by 40% by 2030 as measured from a 2019 base while increasing its annual investment in renewable power and various low-carbon initiatives tenfold to $5 billion annually in 10 years.
After some dividend cuts in 2020, the European majors have much lower dividend payout ratios than their U.S. peers, which may also be contributing to their discounts. Royal Dutch’s dividend of $5 billion over the next 12 months is 20% of its projected free-cash flow, while Chevron’s $10 billion dividend is 60% of projected 12-month free-cash flow, according to Rats
Chevron now yields 5%; Exxon, 6.2%; Royal Dutch, 3.4% based on the class A shares and BP, 5.1%.
Dividends matter, Rats argues, as investors prefer the energy companies to pay out more free cash flow.
The analyst, who has an Overweight rating on Royal Dutch, says the European majors can take steps to address the discounts, including increasing dividend payout ratios or “consider partial listing of their new energies businesses, which would drive market values closer to sum-of-the-parts valuations.”
Write to Andrew Bary at [email protected]