BP vs Shell Stock: Buybacks, Debt, Takeover Talk and Valuation

Watch it play outThe oil shock more than doubled both companies' profits

A year earlier, in the same quarter, Shell earned $4.26 billion of adjusted profit and BP $2.35 billion of underlying profit.

Then Brent jumped from about $81 to about $104 a barrel, quarter on quarter.

Shell's profit rose to $9.84 billion and BP's to $5.73 billion. The faint bars are last year.

Replay

Shell's adjusted earnings came to $9.84 billion in the quarter, its results release shows, up from $6.92 billion the quarter before. BP's underlying replacement-cost profit, its preferred measure that strips out inventory gains, was $5.73 billion against $2.35 billion a year earlier, according to its half-year report.

Check the claimThree things people get wrong about BP and Shell

ClaimShell is legally barred from bidding for BP.Tap to checkMythShell's six-month Rule 2.8 lock-up ended around the turn of the year. Shell could bid. It has chosen not to.Flip backClaimThe UK windfall tax takes 78% of BP's and Shell's profits.Tap to checkMythThe 78% rate applies only to profits from UK oil and gas fields, a small slice of two global groups.Flip backClaimShell trades at a discount to Exxon and Chevron.Tap to checkFactIts free cash flow yield is 11.4%, against 4.5% for Exxon and 6.7% for Chevron.Flip back

How did the oil price shock change BP and Shell?

Oil is the biggest single driver of both stocks. Brent was about $100 a barrel at the latest close, CNBC reports, and is up about 52% on a year earlier, Trading Economics data shows. The ride has been rough: hopes that the Strait of Hormuz would reopen pushed Brent down to $86.28 in late summer before it climbed back.

Brent has swung between the low $80s and over $100 this year

Quarterly averages$81–$104

Late-summer dip$86

Latest$100

$75$85$95$105

The war did more than raise crude prices. Refining margins exploded: BP's indicator margin averaged $29.6 a barrel in the quarter, up from $16.9. Trading desks also made money from the chaos. BP's underlying profit rose 79% from the first quarter, while Shell's rose 42%.

Shell paid for the shock in other ways. Disruption in the Middle East hit about a fifth of its production, and its Qatar volumes are left out of its outlook for the current quarter. Rising prices also tie up cash in inventories and receivables, which is why Shell's net debt rose to $52.6 billion at the end of the first quarter before falling back.

BP publishes a rule of thumb: every $1 a barrel move in Brent changes its annual pre-tax profit by about $340 million. A $10 fall from $100 oil would cost about $3.4 billion a year, and a return to $70 oil about $10.2 billion. That sensitivity is the core risk in BP's balance sheet repair.

Every $10 off Brent costs BP about $3.4 billion a year

Pick where Brent settles for a year

Brent averages

$70$80$90$100$110

Change in BP's annual pre-tax profit vs $100 oil−$10.2B−$6.8B−$3.4B$0.0B$3.4B

−$10.2B−$6.8B−$3.4B$0.0B+$3.4Bbelow $100 oilbelow $100 oilbelow $100 oilin line with $100 oilabove $100 oil

$100 oil $0.0B

−$10.2B$3.4B

Why did BP turn back to oil and gas?

Six years ago BP promised to cut its oil and gas output and become an integrated energy company. Investors were not persuaded. The shares lagged, and early last year Elliott Management, the activist hedge fund, built a stake that it lifted to just over 5%, making it one of BP's largest shareholders.

BP's answer was what its then chief executive Murray Auchincloss called a fundamental reset. Oil and gas investment rose to about $10 billion a year. Spending on transition businesses was cut to $1.5–2 billion a year, more than $5 billion below earlier plans. BP targeted $20 billion of asset sales and net debt of $14–18 billion by the end of next year. Elliott wanted more: it pushed for $20 billion of annual free cash flow and capital spending cut to $12 billion, Yahoo Finance reported.

Three chief executives and three chairs in three years

1. 3 yrs agoLooney resignsAuchincloss takes over
2. Last yrElliott builds ~5% stakeBP resets strategy toward oil
3. Last yrManifold becomes chairFormer CRH boss
4. Late last yrAuchincloss oustedWoodside's Meg O'Neill hired
5. This yrBuyback suspendedAll spare cash to debt
6. This springManifold removedIan Tyler made interim chair
7. RecentlyTyler made permanentO'Neill: focus, perform, grow

The reset did not settle the boardroom. Albert Manifold, the former CRH chief brought in as chair to drive the turnaround, pushed out Auchincloss late last year and hired Meg O'Neill from Australia's Woodside. Then the board removed Manifold himself this spring over what it called serious concerns about governance and conduct, which he disputes. BP's shares fell as much as 9% that day. Ian Tyler, a former Balfour Beatty chief executive, has since been made permanent chair.

O'Neill's message is blunt. "We have not been careful stewards of shareholder capital," she said recently, Rigzone reports, and she will not say when buybacks return.

Why did BP stop buying back its shares?

Because the balance sheet could not support it. BP had bought back stock every quarter for about five years. Last year it cut the quarterly buyback from $1.75 billion to $750 million. Early this year, alongside a fourth-quarter loss after about $4 billion of write-downs on renewables and biogas, it suspended buybacks altogether and dropped its promise to return 30–40% of operating cash flow to shareholders.

The windfall has gone to debt. In the latest quarter BP spent $2.9 billion redeeming hybrid bonds and $1.1 billion on its Gulf oil-spill settlement, and still cut net debt from $25.3 billion to $22.3 billion. It now expects to reach its $14–18 billion target by the end of this year, a year early, and plans to cut hybrids by a further $4.3 billion.

Count the hybrids and BP's debt load is about $35 billion

Net debt$22.3B

Hybrid bonds+$13.0B= $35.3B

Debt plus hybrids$35.3B

Asset sales are the other lever. BP is selling 65% of Castrol, its lubricants business, to Stonepeak for about $6 billion. It has sold its Gelsenkirchen refinery in Germany and is marketing its UK North Sea business and its US biogas arm, Archaea. It expects $8–9 billion of sale proceeds this year.

Will Shell buy BP?

The rumours peaked last year. After press reports of early talks, Shell issued a formal statement under Rule 2.8 of the UK Takeover Code. It said it had no intention of making an offer and had not approached BP. That statement binds a company for six months: no bid and no significant stake-building unless BP's board agrees, a rival bidder appears or circumstances change materially.

The lock-up ended around the turn of the year, and no bid has come. The FT reported late last year that Shell's head of mergers had left after clashing with Wael Sawan, Shell's chief executive, over a possible BP deal, and that Sawan and his finance chief had halted the idea, AJ Bell's press round-up noted. Sawan has said repeatedly that buying back Shell's own shares is a better use of money.

Shell has done a deal, just not that one. It bought Canada's ARC Resources, a shale gas producer, for about $13.6 billion of equity, or $16.4 billion including debt, CNBC reported. About three-quarters was paid in roughly 228 million new Shell shares. That tells you Shell is willing to issue stock it calls undervalued when the asset is cheap enough. A BP deal is a different scale. At $114.7 billion, BP is worth about 42% of Shell. Together they would be worth about $390 billion, still smaller than Chevron's $402.4 billion and well short of Exxon's $674.6 billion. For more on bids for UK companies, see our piece on the UK takeover wave.

How does Shell's buyback machine work?

Shell's policy is to return 40–50% of operating cash flow to shareholders through the cycle, and it returned 44% over the last twelve months. Most of that goes into buybacks, not dividends. Each quarter it announces a new programme, and with its latest results it launched $3.0 billion plus $1.2 billion left over from a programme paused during the ARC deal.

Make a guess

How many quarters in a row has Shell now announced at least $3 billion of share buybacks?

Tap your guess

0–8Your guess8–14Your guess14–20Your guess20–30Your guess

01234567890123456789Quarters

Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 19.

19 straight quarters, according to Shell. It trimmed the quarterly pace from $3.5 billion to $3.0 billion earlier this year, but never dropped below $3 billion.

Shell did trim the pace. With its first-quarter results it cut the quarterly buyback from $3.5 billion to $3.0 billion, after net debt jumped to $52.6 billion. Still, at $3 billion a quarter plus $2.2 billion of quarterly dividends, Shell is on course to return about $20.8 billion a year. That is roughly 7.5% of its market value. BP's dividend alone, at its current rate, comes to about 4.5%, close to its 4.6% dividend yield.

Why does Shell prefer buybacks? Sawan's line, two years ago, was "You can worry about the gap or you could buy the gap." If the shares are cheap, retiring them raises each remaining share's claim on future cash.

Find the tension

Shell says its shares are undervalued. Which line sits awkwardly with that?

Shell's capital decisions

Announced at least $3 billion of buybacks for 19 straight quarters Paid for ARC Resources mostly with about 228 million new Shell shares Targets 40–50% of operating cash flow for shareholders Cut net debt from $52.6 billion to $41.8 billion in one quarter

Tap the phrase you think is the tell.

Spotted it.Not that phrase. Shell issued about 228 million shares for ARC while also buying back billions. Both can be right only if Shell judged ARC cheaper than its own stock.

• “Announced at least $3 billion of buybacks for 19 straight quarters” That is consistent: buy what you think is cheap.
• “Paid for ARC Resources mostly with about 228 million new Shell shares” Issuing stock you call undervalued is the opposite of a buyback. It only adds value if ARC was even cheaper.
• “Targets 40–50% of operating cash flow for shareholders” A payout policy, not a contradiction.
• “Cut net debt from $52.6 billion to $41.8 billion in one quarter” Debt reduction supports future buybacks.

Explain every phraseHide the other explanations

Why is Shell cheaper than Exxon and Chevron?

Investors pay far less for each dollar of Shell's cash flow. On StockAnalysis data, Exxon trades at 12.7 times expected earnings and 10.4 times EV/EBITDA (enterprise value, meaning market value plus net debt, divided by operating profit before depreciation). Chevron is at 12.3 and 8.5 times. Shell is at 8.7 and 5.5 times, BP at 7.4 and 4.3 times.

The US majors trade at far higher multiples than the UK pair

Forward P/EEV/EBITDA

2.55.07.510.012.515.0x0

12.7x10.4x

ExxonForward P/E12.7xEV/EBITDA10.4x

12.3x8.5x

ChevronForward P/E12.3xEV/EBITDA8.5x

8.7x5.5x

ShellForward P/E8.7xEV/EBITDA5.5x

7.4x4.3x

BPForward P/E7.4xEV/EBITDA4.3x

ExxonChevronShellBP

The free cash flow yield, free cash flow divided by market value, makes the same point from the other side. Two years ago Shell's was above 12%, against under 7% for Exxon. The gap has barely moved, even though Shell's shares are up 30.4% over the past year.

Shell's free cash flow yield is two and a half times Exxon's

BP14.1%

Shell11.4%

Chevron6.7%

Exxon4.5%

Trailing free cash flow divided by market value. Source: StockAnalysis (S&P Global data).

Part of the discount is history. European majors spent a decade promising to shrink oil and gas and invest in lower-return renewables, and investors marked them down for it. Part is the market they list in. US investors pay more for US energy stocks, and London has struggled to attract buyers, a theme in our piece on companies leaving the London Stock Exchange.

That is why Sawan said two years ago that nothing was off the table, including moving Shell's main listing to New York. Shell already trades there as American depositary shares. By early last year he said there was "no live discussion" of a move, arguing that relisting would not fix the underlying valuation. We agree. Shell's discount is about the market's doubts over how it spends money, and the cure is the one it is applying: retire shares cheaply until the gap closes or there are far fewer shares left.

What does the UK windfall tax mean for BP and Shell?

The Energy Profits Levy (EPL) is a windfall tax on profits from UK oil and gas production, introduced after Russia invaded Ukraine. It now sits at 38%, on top of 30% ring-fence corporation tax and a 10% supplementary charge, for a headline rate of 78%. It is legislated to run for about three and a half more years, or to end earlier if six-month average oil and gas prices both fall below thresholds that started at $71.40 a barrel and 54p a therm and rise with inflation. With Brent near $100, that escape hatch is shut.

The levy's permanent successor, now called the Oil and Gas Revenue Levy, will charge 35% on revenue above $90 a barrel and 90p a therm, with thresholds rising each year, the Treasury confirmed. Campaigners at the End Fuel Poverty Coalition estimate the current levy could raise over £200 million a month at spring's high prices.

For shareholders, the North Sea matters less than the politics suggest. Shell's UK fields now sit inside Adura, the UK's largest independent North Sea producer, and BP is trying to sell its own. The bigger UK risk is political: windfall tax talk grows whenever oil prices spike, and both companies are easy targets.

How much of the FTSE 100 are BP and Shell?

About a tenth. The FTSE 100 is the index of the 100 largest companies listed in London. At the latest month-end in its factsheet, Shell made up 7.30% of it, second only to HSBC, the FTSE Russell factsheet shows. Shell and BP are the index's only two energy companies, and together they were 10.43%.

Two oil companies are a tenth of the FTSE 100

FTSE 100100.00%

• 7.30%Shell
• 3.13%BP
• 89.57%The other 98 companies

That concentration cuts both ways. A UK index fund is a meaningful oil bet, and the FTSE 100's dividends lean heavily on Shell's. If Shell ever did move its primary listing to New York, London would lose its second-largest company.

BP vs Shell: how do they compare side by side?

Here is the scorecard on the latest figures.

Shell wins on balance sheet and payouts, BP on headline cheapness

	Shell	BP
Market value	$275.8B	$114.7B
Net debt, ex leases	About $12B	$22.3B + ~$13B hybrids
Latest-quarter payout	$5.2B	$1.3B
Buyback	$3B+ a quarter	Suspended
Dividend yield	3.1%	4.6%
Forward P/E	8.7x	7.4x
EV/EBITDA	5.5x	4.3x

BP looks cheaper on every multiple, but it is cheaper for reasons. Its debt is higher relative to its size, a large slice of its latest profit came from refining and trading in a crisis, and its shareholder returns now depend on asset sales landing and on oil staying high. Shell's leverage is lower, its gas and liquefied natural gas business gives it a second engine, and its buyback has run without a break.

What could go wrong?

Oil could fall fast if Middle East flows normalise. Brent's late-summer dip showed how quickly that can happen, and both stocks would follow. Shell's undervaluation thesis could also simply persist for years: the gap with Exxon has barely narrowed despite all the buybacks. For BP, the risks are execution and governance. A board that has changed chair twice in a year has not yet shown it can deliver a multi-year plan, and asset sales such as the North Sea business may fetch less than hoped in a windfall-tax environment.

Our read

Shell is the better business. It earns more per dollar of debt, pays out more, and has a chief executive who has turned down the tempting big deal in favour of retiring cheap stock. At today's market value, each $3 billion quarterly buyback retires about 1% of the company, or more than 4% a year. Over several years, that compounds into a much larger claim on future cash for every remaining shareholder.

The market's mistake is to treat the discount to Exxon and Chevron as a problem Shell must solve with a listing move or a megadeal. The discount is the opportunity. As long as it persists, Shell keeps buying itself at a price US peers cannot match, and a smaller share count makes the eventual rerating, if it comes, worth more per share.

BP is a recovery trade, not a compounder. The new management is saying the right things and the oil shock has pulled its debt target forward a year. But its apparent cheapness depends on $100 oil, crisis refining margins and asset sales closing. Count the hybrids and its debt is about three times Shell's on the ex-lease basis. Buybacks will probably restart once net debt is in the target range, and that could move the shares, but you are paid less for waiting than with Shell.

A Shell bid for BP remains possible, but we would not own BP for it. Sawan has walked away once, and buying BP would mean issuing stock he considers undervalued on a scale far larger than ARC.

Go deeper

• Capital allocation: the framework for judging whether Shell's buybacks or BP's debt paydown creates more value per dollar.
• Dilution and buybacks: why a buyback at an 11% free cash flow yield matters, and why paying for ARC in shares cuts the other way.
• Cyclical companies: how to value businesses whose profits double or halve with the oil price, without anchoring on a crisis quarter.

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