MARKET COMMENT
Oil Is Priced To Buy And Forget

By Maynard Paton (TMFMayn)
January 6, 2003

Oil had a good run during 2002, gushing from $20 to $30 a barrel. But the shares of the sector's two heavyweights did not fare so well; BP (LSE: BP.)(NYSE: BP) slumped 19% while Shell (LSE: SHEL)(NYSE: SC) reversed 12%.

However, events in the Middle East and striking Venezuelan oil workers have kept the price of crude buoyant in the New Year. Assuming:

* The oil industry isn't going to disappear tomorrow, and;
* Big oil players don't give shareholders too many sleepless nights.

...is now the time to invest in BP and Shell?

In terms of assessing BP and Shell, the price to earnings ratio should not be given too much emphasis. An oil company's profits are, as you would expect, highly sensitive to the gyrations on the oil market. For instance, as oil dived to $10 a barrel, earnings per share at Shell fell from 20.9p in 1996 to 10.8p in 1998, but soon jumped to 31.4p in 2000 following a swift recovery.

To circumvent the volatile earnings figures, it's worth using the more dependable dividend payment as a valuation benchmark. Indeed, although year-on-year profits have declined five times since 1990, Shell's dividend never suffered a reduction over that time.

Based on the average share price during the year, the following table shows the historic dividend yield of BP and Shell since 1990:

Year    BP historic yield             Shell historic yield
               (%)                            (%)

1990          4.43                           3.98
1991          4.86                           4.04
1992          7.00                           4.22
1993          3.45                           3.49
1994          2.12                           3.38
1995          2.29                           3.61
1996          2.55                           3.59
1997          2.47                           3.05
1998          2.56                           3.29
1999          2.16                           3.01
2000          2.12                           2.62
2001          2.40                           2.65
2002          3.02                           3.25

At the current 427p share price, BP offers a historic dividend yield of 3.61%. At 411p per share, Shell presently offers a historic dividend of 3.60%.

On a yield basis then, BP shares are now cheaper than they've been for a decade. Even during the oil crisis of 1998, BP at its 369p low offered a historic yield of just 3.0%. However, the historical yield figures for BP around the early 1990s are a little misleading. For a variety of reasons, the company struggled during that time and had to cut its dividend in 1992 and 1993.

Going on the average yield offered in the past, Shell is not such an obvious bargain. During the 1998 industry downturn, canny investors could have picked up Shell with a historic dividend yield of 4%. Such a rating today would equate to a share price of 370p. However, the current 3.6% now on offer is well above Shell's traditional yield.

The simple conclusion? Bearing in mind those earlier assumptions, BP and Shell both look attractive for a long-term buy and forget portfolio.