Royal Dutch Shell Plc Has Just Lost A Limb, But Is BP plc Any Better?

Is there ‘safety in numbers’ with Royal Dutch Shell Plc (LON:RDSB), or is BP plc (LON:BP) better placed to weather the energy market storm?

| 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.

The price of oil just keeps falling! It’s not so surprising, though, given that the underlying dynamics of the market haven’t changed (supply glut and falling global demand), but it’s still an impressive fall. Brent crude has now dropped around 50% since July.

So where does that leave those poor old oil producers?

Already cutting back

It didn’t take long but the world’s major oil producers have started to shed layers as it heats up in the oil and gas market. Royal Dutch Shell (LSE: RDSB)’s latest move is arguably one of the more significant to date. The oil company announced earlier in the week it’s going to ditch its $6.5 billion Qatar project. The Al-Karaana petrochemicals project in Qatar has been deemed uneconomical due to high capital costs. ‘Pointy heads’ often use the Capital Asset Pricing Model (CAPM) to determine if an investment is worth undertaking — that is, do the risks outweigh the returns? Something similar will have been used by the finance team at Shell for this little project… and the end result was a thumbs down.

Is BP a better way to gain exposure to oil?

I’d like to think of BP as an alternative way to gain exposure to the price of oil, but it too is suffering the effects of the bear market. In fact just this week BP (LSE: BP) (NYSE: BP.US) and ConocoPhillips announced they too would be shedding 500 jobs between them in the North Sea. Specifically, BP said it was going to cut 200 onshore staff, and 100 contractors. To save face, BP said that it was all part of a $1 billion restructuring plan announced late last year.

What do the ‘experts’ say?

United-ICAP has been quoted by Reuters saying that the little price spike we had in the middle of this week may have just been “a blip”. In other words — those guys are still bearish on the oil price. Bank of America Merrill Lynch has also been quoted as saying Brent could go as low as $31 per barrel by the end of March this year.

Even the Organization of the Petroleum Exporting Countries (OPEC) has forecast demand for the group’s oil will drop to 28.78 million barrels per day this year. That’s down by 140,000 barrels from its previous estimate. Indeed, official US inventory data released earlier this week show total US crude oil and petrol product supplies at a record high. That all sounds pretty bearish to me, and potentially negative for both comapnies.

According to the Carbon Tracker Initiative, a significant proportion of Shell’s potential future production requires a market price of around $95 per barrel (+/- $15). It’s natural to assume therefore that the oil giant will keep cutting back on its capital expenditure. That will help to at least stem the outflow of cash from Shell but won’t improve the company’s financial position.

What does the market have to say?

Interestingly, the stock prices of both BP and Royal Dutch Shell rallied on Thursday. That’s the market’s way of saying, ‘we think you’re doing the right thing by pulling back a bit’.

In the short term, remember that the bigger you are the harder you fall. So a falling oil price is — at the margin — going to look worse for Shell (bigger cost-cuts and bigger lay-offs) as time goes on.

So what about for investors with a slightly longer time horizon? Well, if you look at some basic fundamentals, the picture becomes a little clearer. Both companies have a similar profit margin of around 4% (made worse by the falling oil price). BP though is sitting on a price-to earnings multiple of 11 times earnings and is yielding a 6-7% dividend return. Not bad. Shell’s dividend is also attractive at a little under 6%, with a P/E of around 12.

The bottom line? This Fool doesn’t think now is the right time to get back into oil stocks (either BP or Shell). When that time does come, however, both stocks will look “cheap”.

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.

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

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »