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2 Energy Dividend Stocks to Buy as Analysts Raise Oil Price Forecasts

Barchart - Thu Apr 11, 7:30AM CDT

Crude oil prices (CLK24) have surged this year on the back of extended OPEC+ cuts, which could cause supply deficits; diminished hopes of a Middle East cease-fire, Ukrainian drone attacks on Russian refineries and retaliatory attacks on Ukraine; Red Sea ship incidents; and economic data showing a surprisingly strong U.S. economy.

And demand is projected to remain robust. In fact, analysts at Goldman Sachs (GS) recently noted that rebounding demand in Europe would add $5 a barrel to the firm’s estimate of $83 a barrel, on average, for Brent crude prices (CBM24) in Q4 of 2024.

Moreover, Russia's decision to reduce oil production to 9 million bpd by the end of June to meet OPEC targets has caught the attention of JPMorgan (JPM) commodities analysts. With the global oil benchmark already above $90, they anticipate this move could propel Brent crude oil prices to $100 a barrel this year.

Here's a look at two energy stocks that offer the potential for capital appreciation on rising European demand, plus regular income in the form of dividends.

Energy Dividend Stock #1: BP Plc

Founded in 1908, London-based BP Plc (BP) offers carbon products and services, with diverse energy operations worldwide. It operates in segments like Gas & Low Carbon Energy, Oil Production & Operations, and Customers & Products, engaging in natural gas production, power trading, wind energy, and carbon capture. Its market cap currently stands at $111.2 billion.

Shares of BP are up 11.4% on a YTD basis, compared to the S&P 500 Energy Sector SPDR's (XLE)16.6% returns over this time frame.

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The stock currently trades at 7.84 times forward earnings and 0.52 times sales – both lower than the integrated oil and gas industry averages of 11.61x and 1.57x, respectively.

For Q4, the company announced a quarterly dividend of $0.431 per share, up 10% annually. The annualized dividend of $1.72 translates to a 4.33% dividend yield. The low payout ratio of 34.4% indicates ample room for the company to increase its dividend in the coming years.

BP also repurchased $7.9 billion of its shares last year. Management approved $3.5 billion of further share repurchases in the first half of 2024 and at least $14 billion through 2025 as part of its target to return at least 80% of excess cash flow to shareholders.

The news of share buybacks and dividend increases helped BP’s shares rise 6.3% on Feb. 6, despite reporting Q4 profit and revenue that missed expectations. BP reported an adjusted profit of $1.07 per share for the period on $52.59 billion in revenue, as commodity prices and refining margins softened year-over-year. 

That said, Q4 underlying replacement cost profit of $2.9 billion beat analysts’ expectations of $2.6 billion, and fiscal 2023 operating cash flow stood at $32 billion, while net debt declined to $20.9 billion.

BP's stock surged after its Q1 trading statement on April 9, where it raised upstream production forecasts for oil, gas, and low-carbon energy. Strong oil and gas trading performance, coupled with a $100 million to $200 million boost from improved oil refining margins, are projected. Analysts tracking BP expect the oil major to increase EPS by 3.1% this fiscal year and 10.1% in fiscal 2025.

BP stock has a consensus “Moderate Buy” rating. Out of the 14 analysts offering recommendations for the stock, five analysts recommend it as a “Strong Buy,” three have a “Moderate Buy,” five give a “Hold” rating, and one says “Strong Sell.”

The average analyst price target for BP is $42.14, indicating a potential upside of 6.9%. However, the high price target of $46.80 suggests that the stock could rally as much as 18.7% from current levels.

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Energy Dividend Stock #2: Shell Plc

Established in 1907, London-based Shell Plc (SHEL) is an energy and petrochemical company that operates via segments including Integrated Gas, Upstream, Marketing, Chemicals and Products, Renewables, and Energy Solutions. With a market cap of $231.1 billion, Shell explores, extracts, markets, and transports crude oil, natural gas, and natural gas liquids.

Shell stock gained 19.5% over the past 52 weeks, surpassing the XLE's 14.2% gains over this time frame.

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The stock currently trades at 8.78 times forward earnings and 0.72 times sales – both lower than the industry medians.

Shell, which handed its shareholders $23 billion in payouts last year, just announced an additional $3.5 billion share buyback to be completed by May 2024, over the first quarter of 2024. 

Additionally, SHEL recently raised its quarterly dividend by 4% to $0.69 per share. The company pays an annualized dividend of $2.75 per share, which yields 3.8%. Plus, with a low payout ratio of 29.4%, there is plenty of room for future dividend increases.

News of the dividend hike came amid Shell’s expectation-beating Q4 results, as the oil major posted $7.3 billion in adjusted earnings, or $1.11 per share, on revenue of $78.73 billion. Its cash flow from operations (CFFO) of $54.2 billion for fiscal 2023 resulted in total shareholder distributions of 42% of CFFO last year. 

Shell stock has a consensus “Strong Buy” rating. Out of the 11 analysts offering recommendations for the stock, eight analysts recommend it as a “Strong Buy,” and three give a “Hold” rating.

The average analyst price target for Shell is $75.17, indicating a potential upside of 3.5%. However, the high price target of $85, assigned by Goldman Sachs, suggests that the stock could rally as much as 17% from current levels.

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On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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