Two of the Best Oil Stocks Cut Dividends, but You Shouldn’t Worry

Historians and statisticians will be busy exploring all the ways the pandemic affected our lives. The reduction in traffic and human activity alone cleared cities of smog and drove oil prices into the negative. With a drastically lessened oil demand, should your money be reserved for the top oil stocks outside the US?

Oil Supply Overshoots Demand

Just as America became a relative petroleum exporter in September 2019, thanks to advances in oil shale extraction, the pandemic turned America’s net petroleum export into petroleum oversupply. Consequently, the price of oil crashed into a negative. To alleviate confusion, this simply means that oil-futures traders are paying buyers to relieve them of their burden.

Otherwise, they would not be able to complete the physical delivery of oil, given the new oversupply problem — and the little space left to store the oil.

European oil companies found themselves in the same boat, with BP (NASDAQ:BP) and Royal Dutch Shell (NASDAQ: RDS.A) having to cut their dividends. BP’s stock value has nearly halved as a result. A lot is happening with the top oil stocks right now.

The Best Oil Stocks Cut Dividends

According to an analysis done by Ryan Todd from Piper Sandler, BP and Shell stand to gain in the long run by cutting dividends. His calculations show a reconfiguration of the oil industry:

• European BP and Shell will outperform American counterparts by being able to generate money at prices for Brent crude under $45 a barrel.
  
• The global price benchmark for the Atlantic region – Brent crude – went down since Tuesday, currently sitting at $45.35 per barrel.
  
• The rating of BP and Shell shifted from Neutral to Overweight, while Chevron shifted to Neutral.

As Todd explains it, the European oil companies are more efficient in managing their run costs:

“We are encouraged by cost reductions that continue to drive down break-evens across the group, and we see valuation at the European majors as more attractive relative to the U.S. majors than they have been in some time, with multiples, break-evens, and free cash flow yields at historically large discounts, while improving visibility on the medium- and long-term strategy should at least partially alleviate concerns on near-term risks,”

This leads us to the 2021 break-even price in favor of BP and Shell after the dividend distribution:

Shell at $37.55

BP at $42.47

vs

Chevron at $49.74

Exxon Mobil at $56.24

This is offset by American counterparts trading at a 40% valuation premium.

Furthermore, BP and Shell are under great pressure to go carbon neutral, as they have committed to doing by 2050. This makes them more appealing to investors, as they are likely to get better deals in future financing.

Considering all these factors, Todd views European oil companies, BP and Shell, on a faster road to recovery, with BP’s rise of $31 from today’s $22.36, and Shell going to $44 from today’s $30.66. Such a prediction stands on a solid calculation, but only you can decide to follow it through on one of our top-rated trading apps.

Disclosure: Tim Fries has no positions in any of the stocks mentioned, and has no plans to initiate any positions within the 72 hours following the publishing of this article. This article expresses the opinions of Tim Fries. Tokenist Media LLC has no position in any of the stocks mentioned, and does not plan to initiate any positions within 72 hours of the publishing of this article. Please consult our website policy for more information.