Bulls Say
BP:
Cash on hand of $23 billion entering 2014 and the coming growth in operating cash flows have BP set up to increase shareholder distributions during the next few years as long as oil prices remain high.
Though its Rosneft stake is very risky, BP now is less exposed to Russia than it was through its ownership of TNK-BP. Rosneft currently accounts for less than 6% of our BP fair value estimate.
BP’s Whiting refinery stands to benefit from cost-advantaged crude for many years to come, and its recent upgrade is expected to generate at least $1 billion in incremental cash flow.
Shell:
Investor sentiment on Shell today is decidedly negative after years of poor execution. If new CEO Ben van Beurden can shake things up enough to where Shell operates in line with its peers, it could prove to be a material near-term share catalyst.
Cash flow growth in the coming years remains on track, and near-term dividend growth looks achievable.
Shell’s downstream has been a chronic underperformer, but this also offers the prospect of materially improving cash flows and returns if cost savings and efficiencies that are being targeted can be realised.
Bears Say
BP:
The remaining Macondo liabilities are daunting: Our valuation assumes $23 billion in remaining cash outflows after tax, which weighs on our fair value estimate.
There is a long history of Western oil companies that have been mistreated by the Russian government. The sovereign risk and the illiquidity of BP’s Rosneft stake should not be underestimated.
Though there’s a good chance that production and operating cash flow will begin growing in 2014, capital investment will also remain high. This will limit BP’s ability to increase its returns on capital in the coming years.
Shell:
Shell's big shale bets have been a huge bust, crushing the profits and returns of its upstream operations in North America. This is likely to be a drag on returns for years unless gas prices rebound or impairments are taken.
Europe is a terrible region for refining and Shell is heavily exposed. Management has been slow to restructure operations here, and this will thus remain a drag on returns.
Shell has upped its annual exploration budget by billions of dollars, but its track record in this area is mixed and there’s a risk this will not be value accretive spending.
