Is It Safe To Invest In BP plc And Royal Dutch Shell Plc While Oil Remains Above $100?

How would profits and dividends at BP plc (LON:BP) and Royal Dutch Shell Plc (LON:RDSB) be affected if the price of oil fell?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Are oil prices above $100 the new normal? For investors in BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), it’s a key question, but the answer is far from clear.

bpBP published its annual Statistical Review this week, highlighting the fact that 2013 was the third consecutive year during which oil prices remained above $100 per barrel. Christof Rühl, BP’s Group Chief Economist, says that the oil market has not been this stable since the 1970s — but describes the apparent stability as “sheer coincidence”.

It’s a coincidence, because disruptions to oil supply, mainly in the Middle East and North Africa, have totalled nearly 3 million barrels per day (bopd) over the last three years. However, these have been offset almost exactly by growth in the US oil industry, where production rose by 1.1m bopd in 2013 alone.

Obviously this finely balanced situation will not continue indefinitely — eventually, supply and demand will fall out of balance, and volatility will return to the oil market.

Are shareholders safe?

Historically, oil prices have only been this high twice before; in the late 1970s, and, briefly, in 2008. Both peaks were followed by sharp falls.

What would happen to BP and Shell’s profits if the average price of oil fell — perhaps to $85?

  BP Shell
Total liquids production, 2013 429.2m barrels 562.5m barrels
Liquid sales, 2013 actual prices $42.6bn ($99.24/bbl) $56.5bn ($100.42/bbl)
2013 sales at $85/barrel $36.5bn $47.8bn
Estimated pre-tax loss $6.1bn $8.7bn
2013 pre-tax profits $23.8bn $33.6bn

Source: Company reports.

I’m not worrying (x3)

Firstly, these numbers suggest to me that while it might be slightly uncomfortable, neither BP nor Shell would have any problems operating profitably if oil prices fell to $85 per barrel.

If lower prices persisted for more than a year, dividends might come under pressure, but both Shell and BP both have very low levels of debt, and could afford to fund their dividends through an occasional weak year for oil profits.

Secondly, both companies have a growing focus on natural gas. Shell sold $20bn of natural gas in 2013, while BP sold gas worth $12.2bn. Both totals are likely to continue to rise: for example, BP has just announced a 20 year, $20bn contract to supply liquefied natural gas to China.

Finally, a significant amount of global oil production would become unprofitable at prices much below $85, meaning that if prices fell too far, supply would naturally become restricted, pushing prices back up again. Shell and BP’s scale and balanced portfolios mean they would probably survive such an experience unscathed: smaller, higher-cost producers, with high gearing would be the first to fail.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland owns shares in Royal Dutch Shell but does not own shares in any of the other companies mentioned in this article.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »