Time is running out to by BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) at rock bottom prices and lock in their high single-digit dividend yields, as the market is wising up to the fact that these majors are well placed to ride out a period of low oil prices.
Since hitting five-year lows at the end of September, BP and Shell have rallied hard. Since 24 September, BP and Shell have gained 18.0% and 17.8% respectively, outperforming the FTSE 100 by 10% over the same period.
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And it looks as if this performance is set to continue. BP and Shell are showing no real signs of financial stress, managements have guaranteed dividends for the foreseeable future, and the two companies’ trading divisions are raking in the cash amid oil market turmoil.
What’s more, there are some signs that the price of oil could be set for a rally in the near future. Producers around the world are showing signs of strain and even low-cost producers such as Saudi Arabia aren’t making any money with the price of oil where it is today.
BP and Shell’s sweeping spending cuts, job losses and cuts to capital spending have convinced many City analysts that Big Oil’s pain is coming to an end.
As a result, City analysts are now more positive on Big Oil’s outlook than they have been for 24 months. Upcoming production cuts around the world should help push oil prices steadily higher, while actions to cut costs have lowered the all-in cost of finding, drilling for and producing oil.
One analyst believes that this year, the breakeven price of Big Oil — the level at which Big Oil makes a cash profit — has fallen 20% year-on-year to $80 per barrel. A further decline in costs to $60 per barrel is expected by 2017.
So, even if oil prices remain where they are today, by cutting costs Big Oil’s financial position is set to improve gradually.
As Shell and BP slash costs to improve cash generation from their oil assets, their trading divisions are reaping the benefits of a low oil price.
For example, BP’s Chief Financial Officer Brian Gilvary said in April that the company’s trading arm made $350m more than “normal” during the first quarter of this year. Shell’s first-half refining and marketing profits jumped 93% year-on-year to $5.6bn.
Shell and France’s Total are the world’s largest oil traders, handling enough fuel every day to meet the needs of Japan, India, Germany, France, Italy, Spain, and the Netherlands.
As BP and Shell adjust to the low oil price, and the market starts to view the companies in a positive light once again, investors are missing out on the chance to lock in the two companies’ market-beating dividend yields.
At present, Shell’s shares support a dividend yield of 6.7%. BP’s shares yield 6.7%.