The drop in the price of oil quoted these days makes investors think of a reduction in the profit margins of European companies responsible for the extraction, processing and sale of crude oil. But despite the market sanction on the price of these shares, no change is expected in the shareholder remuneration policy in the short term. In this way, the Integrated European oil companies offer 6.7% dividend yieldalmost 70 basis points above the average of what they were offering at the beginning of the year. Even Equinor, OMV or Repsol is over 7.5%.
Market sentiment reflects the clear link between oil and gas prices and the refining margin of integrated oil companies: lower commodity prices, lower revenue profitability, as a rule. With Brent below $73.5 per barrel and US Gas Prices Drop 20% Over the year, shares of companies such as BP, Eni or TotalEnergies have suffered. On the other hand, as the policy of distributing profits among shareholders has not changed so far, and has even increased, the dividend yield of these companies is becoming more attractive on the European stock market.
Except for Portuguese oil company Galp and Shell, the entire sector is increasing this ratio. Shell is trading flat for the year, so its dividend yield in 2024 is unchanged from its yield at the beginning of the year. On the contrary, Galp has advanced by more than 33% on the stock market since January 1stwhich reduces the expected dividend yield at current prices.
On the other side are OMV and Norwegian Equinor, which offer profit distribution yields greater than 10%. However, the one that increases its dividend yield the most without even being the one that suffers the most on the stock market in 2024 is Repsol. The integrated oil company started the year with a ratio below 6%, compared to almost 7.8% currently, a gap of more than 180 basis points. In fact, Repsol is currently among the five best dividend yields of the Ibex 35, just behind banks and utilities which are generally sectors historically linked to the distribution of attractive benefits among shareholders.
On the other hand, there are the share buybacks that many of these companies are carrying out these days, taking advantage of the fall in their stock market values. This other way of rewarding shareholders only increases the expected profitability. Furthermore, until now, no signal has been sent to the market that the oil companies were going to reduce the distribution of profits. After a few historical exercises, most often after a 2021 and 2022 of oil price surgedividend payments have only been increasing. Eni’s gross dividend growth rate for the last year is 7%, BP’s 10% and Repsol’s 28.5%, according to Bloomberg. Equinor even pays twice as much today as it did three years ago. However, among the three European oil companies offering the best dividend yield, only the Spanish company has a buy recommendation according to the market consensus collected by FactSet.
Looking back on the last part of the year
A priori, a recovery in oil prices is not expected for the rest of the year, contrary to all the efforts of OPEC+ to achieve this. According to the forecasts collected BloombergBrent crude oil will close the fourth quarter of 2024 at $72.9, almost in line with current prices. In the case of gas, the expected increase is 30% for the last quarter of the year. With these projections on the raw materials market, experts have reduced the average expected gross operating profit in the European sector of 6% compared to what was updated for 2024 on January 1. BP would be the company where the analysts would reduce the expected EBITDA for 2024 the most (by more than 10%), while at Galp, practically no deterioration is expected.
With all these testimonies, the valuations of the experts have suffered in recent months, especially among the large-cap companies in the European sector. For example, the market price target for Repsol now stands at 16.8 euros compared to 17.5 euros set at the beginning of the year. From Bank of America, they reiterate their position of classifying the Spanish company as “underperforming than expected because it is more exposed to the strong correction of refinancing margins“, according to investment bank analyst Christopher Kuplent. For this reason, BofA prefers stocks with greater exposure to upstream (exploration and production) than in the downstream (refining and marketing) by choosing TotalEnergies, Shell and Equinor.
However, the consensus of experts collected by FactSet opens the hand further. Galp and the Austrian OMV advise to hold while at Equinor the majority opinion is to close the positions. All others have a buy recommendation. Among them, Repsol would have the most distance ahead, with more than 40% of potential upside compared to the target price of 16.8 euros. However, none of the eight integrated European oil companies has a stock market improvement margin of less than 10%.
On the other hand, there is the discount that the sector presents on its own recent price. With the exception of Galp, which trades at a PE (earnings reflected in the share price) of almost fourteen times, all have become cheaper so far this year. At this point, it is once again the The oil company Ibex 35, the one that benefits from the biggest discount above its peers by trading at a net profit multiplier on its market capitalization of 3.2 times. That is, it is at a discount of nearly 50% to the industry average, taking Galp out of the equation. This way, The elEconomista.es portfolio expects an even bigger correction in Repsol before doubling its position in the Spanish oil company in order to take advantage of a possible rebound towards the levels set by analyst firms.
