Should You Sell BP plc And Royal Dutch Shell Plc After Warren Buffett Sells Exxon Mobil Corporation?

Does Buffett’s sale of Exxon Mobil Corporation (NYSE:XOM) mean you should sell BP plc (LON:BP) and Royal Dutch Shell Plc (LON:RDSB)?

| 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.

In a US regulatory filing this week, legendary investor Warren Buffett disclosed he had dumped his entire 41 million shareholding in oil supermajor Exxon Mobil (NYSE: XOM.US), during the fourth quarter of last year when oil prices were cratering.

Buffett’s $3.7bn investment in Exxon Mobil, dating from 2013, had made the company a top 10 holding in the portfolio of his Berkshire Hathaway group.

Following Buffett’s bold move, should UK investors call time on FTSE 100 oil giants BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US)?

The first thing I’d say is that Buffett has a patchy record of investing in the oil sector. For example, on one hand he booked a $3.5bn profit when selling out of PetroChina in 2007; on the other, he made what he called “a major mistake” when betting on ConocoPhillips right before crude prices peaked in 2008.

Another thing to note is that we don’t know exactly why Buffett dumped his Exxon Mobil shares. Is he bearish on oil, or bearish on the company, or does he simply see better opportunities for greater returns elsewhere?

Certainly, with billions of dollars under his control, there are factors behind some of Buffett’s decisions that simply don’t apply to smaller investors. Certainly, too, Exxon Mobil’s valuation is markedly different to the valuations of BP and Shell.

Analysts expect oil companies’ earnings to fall by somewhere in the region of a third to a half in 2015. Forecasts put Shell on a P/E of 16.2 (at a share price of £22), BP on a P/E of 19.1 (at a price of £4.45) and Exxon on a P/E of 22.3 (at $91).

Exxon, then, is pricier than its UK counterparts, and remains so if we look out to 2016, where the forecast P/Es are: Shell 12.2, BP 12.9 and Exxon 17.3.

The FTSE firms also appear much superior value to Exxon when we look at dividends. While Exxon’s trailing 12-month yield of 3% isn’t bad for a US company, BP and Shell both boast yields of 5.4%.

Admittedly, analyst forecasts for 2015 mean Shell’s dividend will barely be covered by earnings and BP’s will be uncovered (compared with 1.4x cover for Exxon), but the UK companies’ cover improves with the rise in earnings forecast for next year.

Of course, BP and Shell’s dividends could come under pressure, if analyst earnings expectations for 2016 prove way too optimistic. Even so, though, BP boss Bob Dudley, who expects low oil prices to persist “into the medium term”, seems confident of managing “the new reality of lower prices” with the dividend as “the first priority within our financial framework”. Similarly, Shell boss Ben van Beurden recently told Bloomberg Television: “The dividend is an iconic item at Shell and I will do everything to protect it”.

On balance, given the relatively attractive earnings ratings of BP and Shell compared with Exxon, and their much superior dividend yields, I think if I were a shareholder, I wouldn’t be rushing to follow Buffett’s lead, and selling out of my big oil investments.

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.

G A Chester 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »