Mining vs Oil: Oil shades it still
A year on from our last note on “Miners” vs “Oils” which favoured oil investment
(see Mining vs Oil: Time for scrip?) and, in response to a rising debate on relative
positioning of investors in these two sectors, we update our comparative analysis in
terms of cashflow, balance sheet strength, dividend yield, growth and returns. The key
differentiator is the respective yield (average 7.1% for BP and Shell in 2016E vs 2.8% for
Rio and BHP). We believe Oils can maintain this (despite payout a 2016 ratio of 108%
on spot pricing falling to 89% in 2017 vs 67% and 50% for mining) due to stronger
balance sheets, higher margins and higher ROEs plus more capacity to cut costs and
capex. It’s close though – if miners were to pay out all their spare cash in dividends the
yield would still be lower – just. We rate both BP and Shell as OW with 550p and 2,450p
price targets respectively, BHP EW and RIO OW with 925p and 2,600p price targets.