Shell (LON: SHEL) and BP (LON: BP) are the first and third-biggest oil and gas companies in Europe in terms of market capitalisation. The two have a market cap of over $199 billion and $102 billion, respectively. TotalEnergies sits in between, with a market value of over $149 billion. Shell and BP share prices have done well in 2022 after rising by over 30%.
Why European oil giants lag their American peers
BP, Shell, and other European oil and gas companies gave risen in 2022, helped by elevated prices. The two have risen by 33%. However, they have greatly underperformed their American peers like ExxonMobil, Occidental, and Chevron. They have also lagged the performance of the Vanguard Energy ETF (VDE), which is up by over 40%.
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BP and Shell have lagged because of their large investments in clean energy and the policies of European leaders. In the UK, the government has launched a 35% windfall tax on these companies profits. Similarly, in the European Union, governments agreed to implement a 33% windfall tax on profits.
The companies have also invested heavily in clean energy. BP recently spent over $3 billion buying Archaea, a company that produces Renewable Natural Gas (RNG), as I wrote here. They have also invested in electric vehicle charging stations, solar power, and wind energy. Investors question whether these investments will have a return in the near term.
On the other hand, Exxon and Chevron are investing in industries like carbon capture and reducing their carbon footprint at the source.
Shell vs BP: better buy?
As a result, these companies have become a bargain. BP has a forward PE ratio of 3.7 while Shell has a multiple of 4. Exxon and Chevron, on the other hand, have multiples of over 7x. As a result, these companies have relatively higher dividend yields than their American peers. BP has a forward yield of 4.25% while Shell yields at 3.25%.
Between Shell and BP, I believe that Shell is a better investment despite its lower dividend yield. It has a stronger natural gas business, which will benefit from the rising demand in Europe. Recently, Qatar signed a long-term LNG supply with Germany. Shell is a major player in Qatar’s energy sector.
Further, it is one of the biggest trading companies in the world. As a result, it will benefit from higher volumes even when oil prices remain under pressure.
Shell is also one of the biggest chemical producers. This diversification will help it maintain higher returns in 2023. Further, Shell has announced significant returns to shareholders. It has returned $22 billion to investors compared to BP’s $8 billion.
While Shell is a better buy than BP, buying either of the two will typically generate the same result. As shown below, the two stocks tend to move in sync with each other.
Shell vs BP chart by TradingView