Beginners’ Portfolio: I Wish I’d Bought Royal Dutch Shell Plc Instead Of BP plc

Was it really a mistake to buy Royal Dutch Shell Plc (LON: RDSB) instead of BP plc (LON: BP)?

| 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.

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, with all costs, spreads and dividends accounted for. Transactions are for educational purposes only and do not constitute advice to buy or sell.

Back in August 2012 I added BP (LSE: BP)(NYSE: BP.US) to the Beginners’ Portfolio, and I’ve wondered ever since whether Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US) would have been a better choice. At the time, BP was still emerging from the Gulf of Mexico disaster, but I thought most of the damage was out and reasonably well quantified — I underestimated that for sure, but that’s not the only reason that Shell might have been a better buy.

BP shares have done better

In fact, over the past 12 months BP shares have been the better performer of the two, with only a 0.5% fall to 469p compared to a 14% fall at Shell to 2,060p. Shell shares slumped by 9% on the day the firm’s recommended takeover of BG Group (LSE: BG) was announced, despite my thinking that it’s a good move.

BG shares, on the other hand, climbed by 27% on the day, so it’s clear which set of shareholders are happier with the bid so far. The deal is worth 383p in cash plus 0.45 Shell B shares per BG share, valuing BG shares at 1,300p apiece based on current prices, compared to a pre-bid price of only 910p, so the uptick is understandable — and the premium is surely what Shell needed to offer to get the bid recommended by the BG board.

But with BG shares having been forced down with the rest of the sector since the oil price has been slumping, I still think Shell is getting a good deal even at that price.

Consolidation has been hanging in the air since the black stuff slid so low that even the big operators had to start mothballing some assets as unprofitable at today’s sub-$60 crude price, but at the same time it’s left them with the possibility of snapping up some long-term undervalued assets at relatively knock-down prices.

Beefed-up reserves at a good price

Shell has, in one action, increased it reserves by 25% and its production capacity by 20%. Some of that is in liquified natural gas, which is a key product for Shell — and it will now be the world’s biggest player. That’s a lot less risky that finding the stuff for yourself, but the wisdom of the move does depend on the price.

Fool analyst Nathan Parmalee has estimated the cost to Shell of BG’s proven reserves at around $20 a barrel. He’s right that it’s arguable whether that’s a great price in the short term, and it’s possible that there were reserves out there to be had for less. But when oil was up around $100 it would have been seen as a steal, and I think its more important to focus on getting a good price rather than pushing for a great price and risk losing the opportunity altogether.

In addition, there should be considerable cost saving to be made in combining the two company’s operations, at a time when reducing costs is key to coming out ahead.

Shell’s better for newcomers

Right now, Shell is offering a 6% dividend yield if forecasts are to be believed, and that’s ahead of BP’s 5.5% — and at a lower prospective P/E. Both dividends were perhaps looking a little stretched, but Shell’s looks safer now after the BG deal. I reckon strong dividend income is what beginners should be focused on now, and if I was choosing a big oil company for the portfolio today it would be Shell, not BP.

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.

Alan Oscroft 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

Investing Articles

2 no-brainer FTSE 100 value shares to consider buying with just £500?

These FTSE 100 shares offer exceptional all-round value at today's prices. Could they end up supercharging investors' long-term returns?

Read more »

Investing Articles

These FTSE 250 growth shares could soar over the next year!

The FTSE 250's risen strongly as demand for British assets like shares has recovered. I think these two top companies…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

If an investor put £30,000 into the S&P 500 a decade ago, here’s what they’d have today!

A lump sum investment in S&P 500 shares would have created spectacular returns between 2014 and now. Can the US…

Read more »

Investing Articles

Is Games Workshop a top stock to consider buying in December for the long haul?

With Games Workshop updating on its deal with Amazon, is the UK company a stock to think about buying for…

Read more »

Investing Articles

What does 2025 hold for the Lloyds share price?

Lloyds' share price could be in for a rocky ride next year as tough economic conditions and a fresh mis-selling…

Read more »

Investing For Beginners

3 ways to try and build a bulletproof ISA

Jon Smith explains factors such as allocating funds to defensive stocks as a way to try and smooth out volatility…

Read more »

Dividend Shares

Why the 2025 dividend forecast for Lloyds shares doesn’t tempt me

Lloyds' shares offer a yield of over 6% today. But Edward Sheldon believes other UK stocks will deliver higher overall…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

This is 1 of the hottest themes in the stock market right now and it’s generating huge gains for investors

This area of the stock market's absolutely on fire at the moment. And Edward Sheldon believes the momentum could continue…

Read more »