Shell Beats BP, Why?

The two premier UK oil producers have taken different paths in the last quarter, with rewards for investors key to driving prices.

Two Companies Diverged

Q1 provided stellar results for the oil industry, BP and Shell not being the exception. Both companies reported earnings above expectations, thanks to the explosion in fossil fuel prices in the wake of Russia's invasion of Ukraine and the subsequent sanctions. But, crude prices have normalised in recent months, and investors are now looking at differences in the companies' strategies. Foremost was immediately apparent after BP's results, in which it cut its buybacks despite the high profits. Shares fell in response. Shell, by contrast, kept its payments back to shareholders intact.

The issue of buybacks has some connection to stock performance in considering long-term versus short-term strategy. BP says it is pulling back on returns to investors as it invests in going carbon-neutral. The CEO recently announced that the company was looking to buy farms to produce bioethanol as part of its pledge to switch away from fossil fuels. While it's true that BP did soften its emissions reduction targets in a move billed as a "u-turn" on climate pledges, it is still looking to cut emissions by 20-30% by the end of the decade.

Where's the Money

In comparison, Shell is moving in the other direction, keeping its production on track and pleading to invest $40B in increasing production by 2035. The new CEO said he wanted to "reward shareholders" and committed to producing oil as the IEA warns of a crude supply shortage in the coming months. Shell is committing to making profits now - though still investing as much as $15B in new energy sources - which might explain why investors are more willing to bet on the company, keeping the share price buoyant for now.

It's to be expected that crude producers will have an adjustment in their share price with the energy supply in Europe stabilising. Both BP and Shell had to divest assets in Russia, but BP's participation in Rosneft was a larger part of the business than Shell's partial investment in the Sakhalin-2 gas plant. BP also has a larger presence in the North Sea, expected to see output plummet among rising taxes and shrinking profitability. This divergence is likely to be expressed again in the upcoming interim reports, which could see the gap between the two companies widening - unless BP announces a policy change.

Shell Triangle breakout?

The price of Shell has consolidated symmetrically over time, resembling a triangle pattern. Triangles occurring in upward moves tend to follow the trend, with projections ranging up to 100% of the opening range of the triangle — the measured move. Such a break would open up 2.82, provided the top of 2.61 gives in to potential pressure. Conversely, triangles sometimes break in the opposite direction, with the lower end of the pattern exposing 2.15 and, in turn, the low of 1.90.

Source: SpreadX / SHELL PLC

Key Takeaways

In the first quarter, BP and Shell reported strong earnings due to high fossil fuel prices from Russia's invasion of Ukraine. However, their strategies diverged as BP cut buybacks, leading to a decrease in share price. Meanwhile, Shell plans to increase production, investing $40B and attracting investor confidence. BP focuses on going carbon-neutral, while Shell prioritises immediate profits. The differences in strategy and asset divestments may widen the gap between the companies unless BP changes its policy.