Crude oil prices (CLK24) have surged this year on the back of extended OPEC+ cuts, which could cause supply deficits; diminished hopes of a Middle East cease-fire, Ukrainian drone attacks on Russian refineries and retaliatory attacks on Ukraine; Red Sea ship incidents; and economic data showing a surprisingly strong U.S. economy.
And demand is projected to remain robust. In fact, analysts at Goldman Sachs (GS) recently noted that rebounding demand in Europe would add $5 a barrel to the firm’s estimate of $83 a barrel, on average, for Brent crude prices (CBM24) in Q4 of 2024.
Moreover, Russia's decision to reduce oil production to 9 million bpd by the end of June to meet OPEC targets has caught the attention of JPMorgan (JPM) commodities analysts. With the global oil benchmark already above $90, they anticipate this move could propel Brent crude oil prices to $100 a barrel this year.
Here's a look at two energy stocks that offer the potential for capital appreciation on rising European demand, plus regular income in the form of dividends.
Energy Dividend Stock #1: BP Plc
Founded in 1908, London-based BP Plc (BP) offers carbon products and services, with diverse energy operations worldwide. It operates in segments like Gas & Low Carbon Energy, Oil Production & Operations, and Customers & Products, engaging in natural gas production, power trading, wind energy, and carbon capture. Its market cap currently stands at $111.2 billion.
Shares of BP are up 11.4% on a YTD basis, compared to the S&P 500 Energy Sector SPDR's (XLE) 16.6% returns over this time frame.
The stock currently trades at 7.84 times forward earnings and 0.52 times sales – both lower than the integrated oil and gas industry averages of 11.61x and 1.57x, respectively.
For Q4, the company announced a quarterly dividend of $0.431 per share, up 10% annually. The annualized dividend of $1.72 translates to a 4.33% dividend yield. The low payout ratio of 34.4% indicates ample room for the company to increase its dividend in the coming years.
BP also repurchased $7.9 billion of its shares last year. Management approved $3.5 billion of further share repurchases in the first half of 2024 and at least $14 billion through 2025 as part of its target to return at least 80% of excess cash flow to shareholders.
The news of share buybacks and dividend increases helped BP’s shares rise 6.3% on Feb. 6, despite reporting Q4 profit and revenue that missed expectations. BP reported an adjusted profit of $1.07 per share for the period on $52.59 billion in revenue, as commodity prices and refining margins softened year-over-year.
That said, Q4 underlying replacement cost profit of $2.9 billion beat analysts’ expectations of $2.6 billion, and fiscal 2023 operating cash flow stood at $32 billion, while net debt declined to $20.9 billion.
BP's stock surged after its Q1 trading statement on April 9, where it raised upstream production forecasts for oil, gas, and low-carbon energy. Strong oil and gas trading performance, coupled with a $100 million to $200 million boost from improved oil refining margins, are projected. Analysts tracking BP expect the oil major to increase EPS by 3.1% this fiscal year and 10.1% in fiscal 2025.
BP stock has a consensus “Moderate Buy” rating. Out of the 14 analysts offering recommendations for the stock, five analysts recommend it as a “Strong Buy,” three have a “Moderate Buy,” five give a “Hold” rating, and one says “Strong Sell.”
The average analyst price target for BP is $42.14, indicating a potential upside of 6.9%. However, the high price target of $46.80 suggests that the stock could rally as much as 18.7% from current levels.
Energy Dividend Stock #2: Shell Plc
Established in 1907, London-based Shell Plc (SHEL) is an energy and petrochemical company that operates via segments including Integrated Gas, Upstream, Marketing, Chemicals and Products, Renewables, and Energy Solutions. With a market cap of $231.1 billion, Shell explores, extracts, markets, and transports crude oil, natural gas, and natural gas liquids.
Shell stock gained 19.5% over the past 52 weeks, surpassing the XLE's 14.2% gains over this time frame.
The stock currently trades at 8.78 times forward earnings and 0.72 times sales – both lower than the industry medians.
Shell, which handed its shareholders $23 billion in payouts last year, just announced an additional $3.5 billion share buyback to be completed by May 2024, over the first quarter of 2024.
Additionally, SHEL recently raised its quarterly dividend by 4% to $0.69 per share. The company pays an annualized dividend of $2.75 per share, which yields 3.8%. Plus, with a low payout ratio of 29.4%, there is plenty of room for future dividend increases.
News of the dividend hike came amid Shell’s expectation-beating Q4 results, as the oil major posted $7.3 billion in adjusted earnings, or $1.11 per share, on revenue of $78.73 billion. Its cash flow from operations (CFFO) of $54.2 billion for fiscal 2023 resulted in total shareholder distributions of 42% of CFFO last year.
Shell stock has a consensus “Strong Buy” rating. Out of the 11 analysts offering recommendations for the stock, eight analysts recommend it as a “Strong Buy,” and three give a “Hold” rating.
The average analyst price target for Shell is $75.17, indicating a potential upside of 3.5%. However, the high price target of $85, assigned by Goldman Sachs, suggests that the stock could rally as much as 17% from current levels.
