Pandemic stricken 2020 was a terrible year for the oil and gas sector in many respects. West Texas Intermediate crude oil prices actually went negative for the first time in history. Because of the pandemic, Royal Dutch Shell (LSE: RDSB) cut its dividend for the first time since World War II.
Since late October, the Footsie has advanced around 15%. The rise reflects investor optimism about Covid-19 vaccines, the outcome of US election, and the Brexit deal. The oil and gas sector has been making something of a resurgence in the same period. Here’s a closer look at two FTSE 100 energy companies that have handily beaten the index.
FTSE 100 stock: BP
FTSE 100 stock BP (LSE:BP) has surged around 50% over the past three months.
Although the primary reason for the surge is likely due to higher Brent crude prices, I think there are also other potential reasons for the stock’s rise. For example, management cut a lot of costs in response to the pandemic, making BP a leaner and arguably more efficient company.
The strength of its convenience and mobility business also gives BP valuable diversification away from its hydrocarbon business. According to BP’s Q3 2020 transcript, the business, which sells coffee and groceries among other things, brought in around $5bn in earnings before interest, taxes, depreciation, and amoritisation (EBITDA) in 2019, with pretty decent returns on capital over time.
BP’s convenience and mobility business also has pretty attractive growth potential according to many estimates. Indeed, BP’s head of customers and products, Emma Delaney, said last year, “We believe we can more than offset the impact of fuel volume declines in established markets to 2030 through growth in convenience“.
For BP to do well, however, management will need to execute their strategic plans well. If the execution isn’t there or if oil prices decline meaningfully, I think BP shares could decline.
Royal Dutch Shell
FTSE 100 stock Royal Dutch Shell (LSE: RDSB) shares have surged over 50% in the last three months, making it one of the best performing supermajors over that time.
Like BP, I think Royal Dutch Shell shares mainly rose due to higher Brent prices since late October. With higher oil prices, Royal Dutch Shell has more cash flow to pay down debt or to do other things.
Like its fellow British oil giant, Royal Dutch Shell also has a pretty sizeable convenience business that offers diversification. According to the Wall Street Journal, Royal Dutch Shell has around 45,000 branded retail sites already in its network and plans to add 10,000 more in the next five years. With the right execution, there could be demand for such locations given people simply needing a convenient place to buy snacks or coffee while they charge their electric vehicle or fill up a gas one.
As with BP, I reckon Royal Dutch Shell management will need to step carefully for the stock to do well. If the company struggles with its green transition, oil prices decline meaningfully, or results miss expectations, the stock could lag.
