Image source: Olaf Kraak via Shell plc
Since the beginning of the year, PA (LSE:BP) shares have fallen 2.5%, while the Shell (LSE:SHEL) share prices are up 8.5%. But which FTSE 100 Is the oil company the best buy at current prices?
BP shares are trading at a lower price-to-earnings (P/E) ratio than Shell, implying the market is more bullish on the latter. And I think their different approaches to the energy transition mean the market is right about this.
Energy transition
The energy transition presents a dilemma for oil companies. They can invest in renewable energy projects or stick to hydrocarbons and use their cash for dividends and share buybacks.
One problem with investing in renewable energy projects is that they tend to be expensive and generate low returns. Another problem is that oil companies do not have an obvious technological advantage in this industry.
However, continuing with hydrocarbons is also risky. Even the most optimistic oil forecasts anticipate reduced demand as electric vehicles inevitably replace internal combustion engines.
BP and Shell have taken different approaches to try to resolve the dilemma. And this explains the divergence in its share price since the beginning of the year.
PA
BP has tried to shift its portfolio toward renewable energy. But this has proven to be a challenge, as demonstrated by its offshore wind projects in New York.
The company previously won a contract with the state of New York to build an offshore wind farm. But as high inflation and rising interest rates drove up costs, the project had to be scrapped.
The failure of the project cost BP about $540 million in impairment charges. But after receiving approval for another project earlier this week, there is room for optimism going forward.
Shell
By comparison, Shell has largely avoided committing capital to renewable energy projects. Instead, it has increased its dividend by 25% while also spending $11 billion on share buybacks and investing in its gas business.
The strategy of sticking to traditional areas of expertise reflects the approach taken by their American counterparts. Both ExxonMobil and Chevron They have been expanding their oil capabilities, rather than pivoting to renewable energy.
The risk of this is that oil prices are likely to be supported by factors that will prove to be temporary in nature, such as the war in Ukraine. So this might be the best thing ever.
my verdict
Right now, BP stock has a 5% dividend, while Shell has a 4% yield. However, that’s not enough to make me think the former is a better buy at current prices.
BP’s strategy worries me. Investing heavily in projects that are expensive and offer low returns seems risky, especially in an area where the company lacks an obvious advantage.
Shell, on the other hand, appears to have a much more disciplined approach with its capital. There are risks in underinvesting in a sector in transition, but I hope the company finds better opportunities over time.
As a result, I like Shell’s long-term prospects more. And that’s the most important thing to me when it comes to investing.