There is one metric that makes Shell (LSE:SHEL) and BP (LSE:BP) shares look much more attractive to me than their American-listed competitors.
That metric can be calculated by dividing capital expenditure (CapEx) by operating cash flow (OCF). In other words, it is the amount companies spend on new projects as a proportion of the money they make in a year from normal business activities.
A higher CapEx/OCF means a company is investing more for tomorrow. By contrast, a lower CapEx/OCF could mean a company is paying out big dividends and doing share buybacks at the expense of investing.
Beware of cannibals!
Paying out dividends and buying back shares returns capital to shareholders. However, when done unsustainably, this de-capitalises the company. Essentially, the firm cannibalises itself.
Unfortunately, this is a well-known problem in the oil and gas space. The great intellects of our time, like Greta Thunberg and that bearded bloke from Extinction Rebellion, have decreed that fossil fuels have no future, and should be outlawed by the end of the decade.
That sentiment makes companies in the sector understandably reluctant to spend billions on multi-decade projects to find and extract new supplies.
Peak oil could be far, far away
Despite all of the wind farms, solar panels and hydroelectric plants that have popped up in the last decade, 2021 saw more global demand for oil than any previous year on record.
That record won’t last for long: 2022 is on track to see an even larger quantity of the black, viscous liquid being demanded.
Some analysts even predict we may not see oil demand peak until 2040 — in stark contrast with those more starry-eyed forecasters who believe peak oil will arrive in just two years’ time.
Personally, I’m not hopeful that peak oil will come any time soon. If it seems like a challenge setting up electric vehicle charging points in the UK, imagine what it will be like in the Congo, where burning coal and firewood are the dominant energy sources.
The global population now stands at eight billion, with 85% of those people living in the developing world. If people in poor countries are to live like us in rich countries — which they have every right to aspire to — they are going to need to consume a lot more energy.
CapEx/OCF: Brits on top!
Looking at CapEx/OCF with trailing 12-month data, I find that Shell dominates the field, spending 38% of OCF on sustaining capital investments.
BP comes narrowly behind with 34%.
Interestingly, both of those UK-listed companies trounced their US-listed competitors, with one exception: ConocoPhillips came neck-and-neck with BP, investing 34% of OCF.
Chevron (24%), Exxon (23%) and Occidental Petroleum (22%) were the laggards of the pack.
A flaw in my analysis is that some of that CapEx spending will have been to branch out into renewable energy projects. I would have to dig further into the companies’ accounts to find out exactly how much was spent on sustaining the oil and gas side of their businesses.