2014 has been an extremely difficult year for oil companies across the globe. That’s because the price of oil has fallen heavily and now stands at little over $80 per barrel – down from around $110 where it had been for a number of years.
This means that profitability has been hit, with the latest oil major to report, BP (LSE: BP) (NYSE: BP.US) , showing a decline in the bottom line of around 20%. While disappointing, this was expected and, as such, shares in the company were not hit particularly hard.
However, with Shell (LSE: RDSB) (NYSE: RDS-B.US) set to report its interim results on Thursday, could it also disappoint investors and, more importantly, cause sentiment to worsen over the near term?
Differing Businesses
While BP and Shell are both oil majors, their current circumstances differ somewhat. For example, BP is still dealing with the fallout from the Deepwater Horizon oil spill in 2010, with the company still making provisions and paying compensation claims. These look set to be a feature of the company’s operations over the medium term and are likely to hold sentiment back somewhat moving forward.
Meanwhile, Shell is making significant changes to its business model and is seeking to offer investors the ‘best of both’, in terms of a stable, cash-generative business coupled with a more nimble operator that is able to pull its weight when it comes to exploration activities.
Similarities
Of course, the lower oil price affects both companies and, as a result, it is very likely that Shell’s profitability will be hit relatively hard when it reports on Thursday. However, this is something that comes with the territory of investing in oil stocks. Neither BP nor Shell have any control over the price of oil and, as a result, their margins will fluctuate over time. With the oil price having been relatively stable in recent years, this is probably a return to normality rather than a reason for investors to become concerned.
Looking Ahead
In fact, now could prove to be a great time to buy shares in Shell and BP. Clearly, profits are going to be hit in the short term and, with Saudi Arabia apparently unwilling to reduce supply so as to maintain its market share, the oil price could move lower before it moves higher.
Despite this, shares in both companies continue to offer great value, with them having price to earnings (P/E) ratios of just 9.5 (BP) and 9.8 (Shell). Furthermore, with well-covered yields of 5.6% (BP) and 5.1% (Shell), they offer top notch income potential as well as value for money. As such, and although the short term could be volatile, Shell and BP could be well worth buying after disappointing results.
