The analyst (pictured) has "buy" recommendations on both stocks, but favours the smaller BP, which he says will be able to grow faster as it recovers from the trauma of the Deepwater Horizon disaster. He is also positive on Shell despite third-quarter results this week that were poorly received by the market.
Shell finished yesterday down 4.94 per cent, in sharp contrast to the boost that BP received after it reported on Tuesday.
Performance of stocks over one month
Source: FE Analytics
"We still like them both and we still rate them as a 'buy'," Miah said. "With Shell, this is simply because this is going to be a core holding for most income portfolios, so we would expect Shell to be stable."
"The share price has been stable and in a range over the past two and a half to three years."
One key difference between the stocks is the size. Royal Dutch Shell has a market cap of £132.77bn whereas BP is only £90.98bn in size. This is one factor providing stability.
Geographical allocation isn’t too different, although Shell has had long-standing problems with its Nigerian operations.
The government has proved itself to be less than friendly, with anti-colonial sentiment causing a large segment of the population to resent the company’s profits.
"The other main difference is Shell is much bigger in terms of infrastructure," Miah added. "But I would also say it was older and aging."
The company is in the process of upgrading a lot of its infrastructure, which is an ongoing cost drag on the company.
Miah says this isn’t a negative from his point of view and is already factored into the share price. However, it is one reason the company is likely to grow less quickly in the coming years.
While BP’s results were well-received by the market, Shell suffered despite the fact that both reported similar falls in earnings.
Shell’s third quarter earnings were $4.2bn, down from $6.2bn a year earlier – a 32 per cent drop.
The company blamed increased operating and exploration expenses as well as lower production volumes from maintenance and asset-replacement activities.
The company’s Nigerian operations were particularly problematic, with pipelines being cut off at various times. The company blames sabotage and theft for stoppages that cost it 65,000 barrels of oil a day.
BP saw net profits down 34 per cent, blamed on declining refinery profits. Total oil barrel production was down 2.3 per cent.
Shell did manage to maintain its dividend at the same level as the second quarter, however, with the payout up 5 per cent on last year’s third-quarter figure to 45 cents.
BP increased its payout by 5.6 per cent to 9.5 cents a share, and Miah says the prospects for dividend growth are much better for the stock.
The firm has sold off some lower-yielding assets, improving the efficiency of its operations. It has been faster to do this, partly thanks to the restructuring pressures forced upon it by the Gulf of Mexico.
Uncertainty over the final cost of that disaster is one reason it is still far off its price prior to that event.
"BP is still in the realms of transforming itself from the company it was prior to the Gulf of Mexico oil spill and is progressing well," Miah said.
"It is in the process of restructuring its portfolio, selling off low-returning assets and investing more in those which have higher growth opportunities."
"Initially this will result in a smaller and leaner operation, with production set to fall in the near-term; however, this is being sacrificed for the longer-term prospects.
Performance of stocks over 5yrs
Source: FE Analytics
The company also has great opportunities for growth in the Arctic, Miah explains. Although its tie-up with the billionaires of TNK ended acrimoniously, the end result is pretty good.
It will continue to receive a cashflow from the share of Rosneft it won as part of the deal, while the Arctic remains a potential source of new reserves.
"We recommend the stock as a ‘buy’ for investors willing to take on an intermediate level of risk while looking for capital growth and some income," Miah said.
Shell, on the other hand, is suffering from its higher exposure to gas, which makes up around half of its annual product.
Profits on this commodity have been hit by the development of shale gas in the US. The company’s attempts to expand into the industry have gone badly, according to chief executive Peter Voser, who says the company’s endeavour came too late in the process to see much success.
The company has recently put up for sale its holdings in the Eagle Ford shale reserve in Texas as part of a review into its participation in the industry.
Miah says that the company is big enough to absorb these disappointments, although it is likely to grow more slowly. This is why he prefers BP.
There is no reason why investors shouldn’t hold both, he adds, as long as the oil and gas sector doesn’t make up too much of their overall portfolio.
There are 206 funds in the IMA universe that hold both in their top-10. Recently the managers of the Kennox Strategic Value fund told FE Trustnet the sector is one of the most attractively valued in the market.
Oil and gas stocks do particularly well from the bottom of the business cycle, they explained.
