Energy Business

What Deutsche Bank Found to Love in European Oil Giants

The analysts see risks if Total’s expectations for carbon capture and storage technology do not materialize soon enough to “validate” Total’s outlook to 2050. If investors sense that Total’s commitment to a low-carbon business is faltering, higher costs of capital could reach a “prohibitive level.”

Total’s shares traded down less than 1% in New York Wednesday, at $44.63 in a 52-week range of $28.65 to $50.41. The consensus price target is $55.13, and the annual dividend is $3.09 (yield of 6.73%).

Shell

Netherlands-based Royal Dutch Shell gets a Buy rating from Deutsche Bank, along with a price target of £19.37 ($26.91). That implies upside potential to a current price of around $36.60 of 37%.

Much of the analysts’ optimism comes from a forecast full buyback restart in 2022. Assuming a $10 billion buyback (6.7% of Shell’s current market cap) and dividend coverage of six times, Deutsche Bank expects total shareholder distribution yield to reach 10.7%.

Shell currently trades at around 8.5 times expected 2021 earnings, 14% lower than the sector average of 9.9 times and a discount of 35% to the European oil sector’s five-year average.

The analysts also list eight downside risks to their rosy outlook for Shell. Among these are operational accidents (explosions, leaks, and the like), a failure to deliver a promised buyback once a net debt target is reached, a collapse in LNG prices and an investor perception that the company is not committed to its low-carbon business.

The shares traded Wednesday at around $36.50, in a 52-week range of $21.79 to $42.29. Shell pays an annual dividend of $1.33 (yield of 3.67%).

BP

Coverage of U.K.-based BP was initiated at Hold with a price target of £3.13 ($4.35) in London. In New York, the company’s American depositary shares (ADSs) traded recently at  $24.85. One ADS is equal to six ordinary London-traded shares. At that price, the potential upside on BP’s stock is 3% and the company’s $1.26 annual dividend reflects a yield of 5.1%.

Of the companies in the bank’s latest ratings, BP is the only one that fails to get a Buy rating. Largely that’s the result of a weaker-than-average balance sheet and the company’s ambitious target of a 40% drop in oil and gas production by 2030. That drop does not include lower production at Russia’s Rosneft, which accounts for about a third of BP’s crude production.

BP also has targeted 50 gigawatts of renewable power generation capacity by 2030 and a 10-fold increase in electric vehicle charging points to 70,000 by the same year.

Deutsche Bank notes downside risks in BP’s “relatively high” gearing (net debt-to-net debt + equity ratio) and notes that its “decarb ambitions are not risk-free.” On the upside, the analysts think the downside risks, including “a faster-than-expected ramp up in low carbon earnings” and BP’s proven ability to manage change that “could potentially result in a decarb valuation premium relative to the peers” are lower “if credible data supports claims of progress being made.” In other words, no fibbing.

BP traded up about 0.7% in New York Wednesday morning, at $24.95 in a 52-week range of $14.74 to $28.57. The consensus price target on the ADSs is $30.55.