What Deutsche Bank Found to Love in European Oil Giants

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It’s not easy these days to find analysts who are upbeat about oil companies’ prospects over a period longer than a few months or a year. That’s not entirely due to volatility in the commodity markets for crude. At least as important is how major integrated oil companies plan to address the transition to cleaner energy sources.

In a report published Tuesday on Europe’s eight largest integrated oil companies, analysts at Deutsche Bank put it this way: “The days when an oil company’s worth was based on how credible a production growth story it could present are not long gone, but they are definitely gone.” Those days are gone because there is no longer any serious opposition to the warnings of climate scientists. Investors are demanding change, and governments have finally, if slowly, gotten on the de-carbonization train.
But can the world reach a net-zero target by 2050? Deutsche Bank’s analysts are skeptical:

Given current country and company targets, this goal, whilst touted by many as underway in some form, looks totally unachievable, in our view; … net-zero by 2050 implies a 1.4 [billion metric ton per annum] fall in CO2 emissions. What does that mean in real terms? The answer is it is equivalent to closing 260 [gigawatts] worth of coal fired power stations each year (i.e. over 400 of them). Meanwhile, in the real world, China has 250 [gigawatts] of new coal power stations under construction or planned.

Of the eight European oil majors, Deutsche Bank on Tuesday initiated coverage on four: Eni SpA (NYSE: E), Royal Dutch Shell PLC (NYSE: RDS-B), Total S.A. (NYSE: TOT) and BP PLC (NYSE: BP).


Italy-based Eni scored a Buy rating from the Deutsche Bank analysts and a price target of €11.50 ($13.80). At a current price of around €10.1, the upside potential is 11%m and the analysts estimate a dividend yield of 7.53% for 2021, the highest of any of these four stocks.

Eni ranks near the bottom of the bank’s scorecard due to its heavy reliance for profits on high-carbon oil. But Eni has committed to a net-zero target by 2050, including the so-called Scope 3 requirement for zero emissions from the products it sells.

Deutsche Bank forecasts that 2021 coverage of dividends and buybacks are twice the bank’s forecast free cash flow with oil priced at $65.80 a barrel. The analysts also are encouraged by Eni’s hopes to spin-off or sell its renewables and retail business, commenting that “this would shine a welcome light on the true value of an implicitly undervalued part of its operations.”

Eni traded Wednesday at around $24.56, in a 52-week range of $13.36 to $25.23, with a consensus price target of $22.00. The company pays a dividend of $0.56 (yield of 2.29%).


Deutsche Bank’s analysts settled a Buy rating on Paris-based Total, as well as a price target of €46.60 ($55.94), implying an upside of 23% to a recent price of around $44.60. Deutsche Bank estimates a 2021 dividend yield of 7.1%, second only to Eni’s projected yield.

Total’s growing liquefied natural gas (LNG) business, strong balance sheet, safer dividend and return on average capital employed of 10.6% is higher than any of the other three stocks in this review. Gearing of 25% is below the European average of 28%, and gives Total “low carbon investment optionality and underscores Total’s relative dividend security.”

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%).


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%).


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.

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