Investors have generally done very well over the long term by following Warren Buffett’s aphorism to “be greedy when others are fearful.” Years from now, will investors kick themselves for not following this advice with regards to out-of-favour shares of BP (LSE: BP), Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD)?

Following Buffett’s advice is never more relevant than when investing in the highly cyclical oil & gas industry. Integrated oil majors BP and Shell may have posted disappointing results in 2015, but both are in great shape to rebound when oil prices eventually rise.

Thanks to the Gulf of Mexico spill, BP has reset costs earlier than competitors by selling off high-cost assets and cutting headcount sharply. Due to these actions, management maintains that it will be able to cover operations, capex and dividends with crude prices in the mid $50/bbl range by next year. Thanks to a healthy balance sheet, significant low-cost assets and record profitability at downstream refining assets, BP is well positioned to survive until prices reach that level.  

Meanwhile, Shell’s £35bn deal for BG Group may have been expensive, but it will make the combined company the world leader in liquefied natural gas. With the addition of BG’s significant low-cost assets, the deal begins helping dividend payments with oil at $40/bbl and is break-even with crude prices of $60/bbl. Although we may be months or years away from that price, high cash flow from the downstream division and low debt levels will keep the ship upright while navigating this challenging environment.

  2017 Price/Earnings Dividend Yield Gearing
BP 12.5 8.1% 21.6%
Shell 12 8.6% 20%+ (post-BG deal estimate)

Although neither company’s earnings covered dividends last year, analysts are expecting this situation to end in 2017 as one-off costs fall and oil prices rebound. The healthy balance sheets and high yields this table shows, combined with relatively low valuations, suggest to me that investors will find today’s prices a great deal for each of these companies. Crude prices may never return to $120/bbl, but BP and Shell are both in position to be profitable at half this price.

Green shoots of (Project) Spring?

Telecoms provider Vodafone’s 5.1% yield proves that oil & gas shares aren’t the only ones offering great dividends. The company is finally beginning to reap the rewards of its £20bn Project Spring programme to roll out 4G to coverage more than 80% of Europe’s population and broadband coverage to 46% of households on the Continent. These upgrades are meant to encourage greater adoption among consumers of the highly profitable quad-play bundles of mobile, landline, TV and internet.

With this massive capex spending behind it, the company returned to profitability last year but significant issues remain. The company still has £29bn of debt, earnings aren’t expected to cover dividends for at least the next three years, and revenues continue falling in Germany and the UK, its largest markets.

Furthermore, the shares aren’t cheap, trading at 36 times 2017 earnings. This lofty valuation and Vodafone existing in a highly competitive, capital-intensive industry lead me to believe investors won’t regret avoiding Vodafone shares.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.