Why Royal Dutch Shell Plc Still Beats BP plc For Growth

Earnings growth at BP (LSE: BP) (NYSE: BP.US) was set to get back on track in 2015, but with the price of oil in a bit of a slump and the “gross negligence” judgement over the Gulf of Mexico disaster both hitting hard, analysts have reined in their expectations.

There was always going to be a fall in earnings per share (EPS) this year, although prospects were looking a little cheerier a few months ago. Today, however, we’re looking at a consensus for a 46% EPS fall for the year to December 2014 with only a very modest 3% pencilled in for 2015.

Third-quarter results released on 28 October showed a headline 59% fall in replacement cost profit to $9,402m, although the company reckoned its underlying figure dropped by only 6.8% to $9,897m. The range of possible year-end EPS figures must be wide, but its going to be weak.

Shell going well

At Royal Dutch Shell (LSE: RDSB), meanwhile, there’s a forecast of 33% growth in EPS for the year ending December, although the City sees that falling back by 4% in 2015.

At Q3 time reported last month, Shell post a 16% rise in nine-month current cost of supplies earnings to $19,300m, although things seem to be getting better as the year progresses — the third quarter itself brought in a 31% rise to $5,847m.

Shell’s strategy of divesting lower-margin assets and concentrating on its highest-quality operations is paying off — as it its investment in new deep-water fields upstream.

Both companies have been hit by the falling price of oil, of course. From a high of nearly $115 per barrel in the summer, the price of crude scraped $78 just over a week ago. But there’s an OPEC meeting coming up this week, which many think will set lower production volumes, and that seems to settled the jitters a little — crude has recovered a couple of dollars and is hovering around $80 today.

Share prices

On current valuations there’s not a lot to choose between the two. BP shares are trading at 443p, putting them on a forward P/E of 10.4 this year and dropping to 10.1 next. And very similarly, at a price of 2,364p Shell shares are on P/E ratios for the two years of 10.5 and 11.

Expected dividend yields at BP are a little stronger with 5.5% and 5.7% penciled in for the two years, compared to 4.9% and 5.1% for Shell, so BP shares are a little more bargain-priced at the moment on fundamentals alone.

But I don’t think the BP discount is sufficient to compensate for the higher risk — and it hasn’t been for some time now.

So for me, growth prospects at Shell are definitely superior.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.