MARKET COMMENT
Oil Shares: Good To The Very Last Drop

By David Kuo (TMFDragon)
April 13, 2004

How much oil is left in the ground?

That depends very much on whom you ask! According to the US Government, there may be 1.6 trillion barrels of oil left in the ground. The Oil & Gas Journal reckons that 1.2 trillion barrels might be closer to the mark. Over in Sweden, the University of Uppsala believes there could be as much as 3.5 trillion barrels of oil still remaining in the ground.

So, given that we are using up 29 billion barrels of oil annually the world's natural supply of oil could be exhausted sometime between 2040 and 2120. That is provided we continue to consume oil at the same rate as we do today, which is likely to be somewhat optimistic.

The possibility that our natural oil reserves could actually run out was hammered home recently. This followed Shell's (LSE: SHEL) admission that it had overstated its proven oil reserves by some 20%. Whether Shell intended to deliberately deceive investors is still unclear. However, what is no doubt is that we will run out of the black stuff one day!

So what should investors do?

It is perhaps safe to say that most of the world's easily extractable "cheap oil" has now been taken out of the ground. A substantial portion of the oil that Mother Nature left us has now been used up. Consequently, the days when oil can be sold for below $20 a barrel, according to some pundits, is gone for good.

In future, oil producers will need to continually ratchet up oil prices to make it viable for new sources of "more expensive" oil to be extracted. As far as oil companies are concerned they will continue to extract and refine oil as long as there is a demand for it. Thus far there is little indication that demand is abating.

Investors should not get too concerned with stories about the exhaustion of oil supplies. Nor should long-term investors get too bogged down with gyrating oil prices, which tend to reflect global political issues. Instead investors should focus on company fundamentals and, in particular, the dividend yield.

At the current share price of 486p, BP (LSE: BP.) is yielding 3.2% based on its prospective dividend payout of 15.4p. Shell, on the other hand, is forecast to pay a dividend of 16.2p this year, which would suggest a prospective yield of 4.3%. Its shares stand at 374.5p.

On a yield basis, Shell is some 30% cheaper than BP, and looks a bargain at this price. Of course, it can be argued that Shell could cut its dividend payout. However, there is little indication of this happening. In fact, its dividend is forecast to increase to 16.7p in 2005.

Personally, I like the reliable payout from oil companies, and I find this a good reason to invest in oil shares. Furthermore, long-term investors who are keen on capital growth should also consider re-investing their dividends to maximise their returns from investing in oil shares.

The writer has a beneficial interest in Shell.