Is BP plc Set To Outperform Royal Dutch Shell Plc In 2016?

Should you buy Royal Dutch Shell Plc (LON: RDSB) or BP plc (LON: BP), or maybe even both, for 2016?

| 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.

sdf

If you’re looking to invest in the oil sector next year, Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) should be on your hit list.

The two oil giants have many advantages over their smaller peers, such as strong balance sheets, integrated operations and some of the lowest production costs in the business. Indeed, it doesn’t make sense to buy into the smaller producers such as Tullow OilPremier or Enquest when shares in Shell and BP are both on offer. 

For income investors, both Shell and BP offer an attractive proposition at current levels.  Shell’s shares support a dividend yield of 8%. BP’s shares yield 7.2%, and both companies are taking drastic action to ensure that their dividend payouts remain in place for the foreseeable future. 

City analysts believe that during the next 12 months, the breakeven price of Big Oil – the level at which it makes a cash profit – will fall by 20% to $80 per barrel. A further decline in costs to $60 per barrel is expected by 2017.

Held back 

Even though Shell’s shares may support a dividend yield of 8%, they’re unlikely to outperform the market next year. You see, many analysts and investors are concerned about Shell’s decision to buy BG Group.  

There’s no denying that the Shell-BG merger is fraught with risks, especially when you consider that the oil industry is facing an unprecedented period of pain. 

Still, Shell has built a reputation for excellent project management over the years, and now more than ever the company needs to show that it can execute.

To reassure investors that the deal does indeed make sense, Shell has hiked the dollar value of savings it expects to generate by combining with BG. An additional $1bn in savings will come from cost cutting in back office functions, marketing and shipping, which had already been expected to save $1bn a year.

Further, the enlarged group will be able to save $1.5bn per annum from a cut in exploration activities, as the combined group spends less on searching for new oil fields.

Only time will tell if these cost savings are realistic. As I mentioned above, now is the time for Shell’s management to demonstrate that it can execute and successfully integrate BG. 

Dividend safety

On the other hand, BP’s shares should outperform if the company can show that its dividend is sustainable. 

The company’s yield of 7.2% is almost double the FTSE 100 average. However, if BP can prove that this yield is here to say, income investors will buy-in and keep buying until the yield returns to a more normal level of around 5%. BP’s shares would hit 520p before the yield reached this level.

Management is already taking steps to reassure investors that the payout is here to stay. Capital spending has been slashed by a fifth for 2015 and BP has halted buybacks to free up more cash for the dividend. 

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.

Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. 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

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Growth Shares

This FTSE 250 stock has beaten the index by around 10x over the last year

Jon Smith rates a FTSE 250 stock that has smashed the broader index performance and could keep going based on…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

B&M shares are at record lows! Is now the time to consider buying?

The retailer, demoted from the FTSE 100 to the FTSE 250 last year, continues to struggle. But are B&M shares…

Read more »

Investing For Beginners

2 reasons why the stock market could hit 10,000 points by December

Jon Smith explains how the makeup of the UK stock market and the current valuation could support a move towards…

Read more »

Queen Street, one of Cardiff's main shopping streets, busy with Saturday shoppers.
Investing Articles

Why this FTSE 100 rocket is this investment trust’s number 1 holding

A UK investment trust is certainly going against the grain by having this FTSE 100 share as a high-conviction holding…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

These 2 FTSE growth stocks jumped 8% and 4.5% today!

Ben McPoland takes a closer look at a pair of FTSE stocks that are performing really well recently. Why are…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

This under‑the‑radar FTSE 100 growth stock is also a secret dividend superstar!

Harvey Jones belatedly wakes up to a brilliant FTSE 100 growth stock that has an equally remarkable track record of…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Barratt Redrow share price plunges 9% on profits hit – time to consider buying?

Harvey Jones says FTSE 100 housebuilders continue to suffer with the Barratt Redrow share price slumping on a profit warning.…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Growth Shares

Why the next month could make or break the Lloyds share price

Jon Smith outlines two key events in coming weeks that could influence the Lloyds share price, leading him to make…

Read more »