Soaring profits mean Shell PLC (LSE:SHEL, NYSE:SHEL) may possibly announce a ‘double-digit’ percent dividend increase whilst BP PLC (LSE:BP.) may possibly boost the size of its US$2.5bn share buy-back programme by 50%, that’s according to analysts at American investment bank Jefferies.
Investors continue to underestimate and undervalue the current free cash flow generation potential among oil and gas majors.
It comes as crude oil and gas prices remain elevated due to volatile geopolitics, Russian sanctions and a broader push towards decarbonisation which has led to underinvestment in new projects, leading to expectations of tighter supplies and dependence upon smaller numbers of suppliers.
Prices will remain higher for longer, according to Jefferies analyst Giacomo Romeo who, in a note, said: “Our updated energy macro deck reflects the ever tighter supply / demand balances in energy.
“A rebalancing of the oil market is unlikely to come from demand responses alone, with Russian production set to decline further as the EU sanctions are implemented.
“The outlook for gas remains largely driven by the evolution of Russian exports to Europe, with the return of Nord Stream from maintenance on July 21 a key catalyst.”
Jefferies has now upgraded its forecasts for crude oil and European gas benchmarks – with Brent for example now forecast at US$105 per barrel, up from US$70.8.
Looking ahead to second-quarter results, released later this month, Romeo said: “we expect sector earnings at US$66bn to increase 28% sequentially, topping 1Q earnings, which were already the best quarterly earnings in at least 12 years. Based on our marked-to-market estimates, we expect consensus upgrades of ~18%.”
“We expect yet another round of material increases in shareholders' remuneration.”
The analyst believes Shell should lead its peers, predicting a further increase to the dividend, whilst tipping BP for an upgrade to its buy-backs.
Romeo reckons other European majors may show more restraint, for fear of provoking windfall taxation.
Altogether though, it adds up to lucrative returns for shareholders.
Based on the current shareholder remuneration level, the independent oil companies offer a ~9% yield as either dividend or buyback, Shell offers the highest upside (6.5% upside yield to 15.5%), while BP has the highest absolute yield (15.5% with upside to 18.3%).
“Shell remains our top long-term pick, justified by its LNG exposure, shareholder remuneration upside, and balanced energy transition strategy,” the Jefferies analyst summarised.