Which is the better oil play: Royal Dutch Shell plc or Premier Oil plc?

Royal Dutch Shell plc (LON: RDSB) and Premier Oil plc (LON: PMO) offer a solid and a risky way to play the oil price recovery, says Harvey Jones.

| 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.

Merry Christmas everybody, but I’m not here to talk turkey, I’m here to talk oil. The energy industry has plenty to celebrate today, as the recovery finally kicked in lifting Brent Crude to around $65 a barrel in January. This spells festive fun for an industry that has worked hard to make itself profitable at much lower prices.

Surer Shell

In 2014, oil giant Royal Dutch Shell (LSE: RDSB) needed oil trading at more than $80 a barrel to break even. Last year, its break-even point fell below $40. Cost control and a $30bn assets divestment programme have helped, with operational expenditure down 20% since 2014. Nobody is worried about Shell cutting its dividend at the moment.

The group’s share price is up a solid 17% over the past six months and management has further cheered investors by pledging to begin paying a cash dividend again in the fourth quarter, with plans to cancel the scrip dividend programme it has been running since 2015. It remains focused on cutting debt, vital given its high debt-to-equity ratio. Free cash flow should now strengthen slightly, hitting $25bn-$30bn by 2020 with Brent crude at $60, up from $20bn-$25bn in June last year.

Going Dutch

Shell trades at a whopping 56 times earnings but that is forecast to fall to around 17.4 times, due to a massive forecast 222% increase in earnings per share (EPS) in 2017. There is rarely a bad time to buy Shell, given its long-term dividend track record, and today’s attractive 5.7% yield. Long-term investors might as well buy it today. There are even bigger yields out there, including Centrica’s whopping 8%. Here’s another FTSE 100 name I would buy and hold forever.

Premier Oil (LSE: PMO) has rebounded faster as crude recovers, up a whopping 65% in six months. With a market cap of £398m, a tiny fraction of Shell’s £92.58bn, much faster price movements are to be expected in both directions. Also, there is no dividend to see you through the tricky times.

Lower league

The big worry is Premier’s massive debt pile, which crept up from $2.7bn in June to $2.8bn in September, due to the late summer North Sea maintenance season. Chief executive Tony Durrant said it will restart debt payments from early next year, and pledged the group’s strong pipeline of projects will boost the company’s momentum. Markets were unmoved.

Premier recently agreed to sell its 30% stake in its non-core Esmond Transportation System pipeline in the North Sea to Cats Management for up to £23.6m, but there is a long way to go. It currently trades at just four times earnings. Its forecast valuation is 95.4 times earnings, which shows the level of volatility and risk you are taking on here.

Oil bull

OPEC’s drive to reduce the global glut in crude oil seems to be working, with US inventories falling by the fastest weekly rate in four months. However, Trump’s tax slashing should boost the already streamlined shale oil industry, driving fresh investment and output. Now looks like a solid time to buy and hold Shell, but you will have to be a full-on oil bull to buy Premier.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we 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

£9,000 in savings? Here’s how I’d target a £14,616 annual passive income with M&G shares!

Big passive income can be generated over time with 9.5%-yielding M&G shares, especially if the dividends paid are used to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

If I’d put £1k in this FTSE 100 stock five years ago, here’s how much I’d have now!

Mark David Hartley works out what sort of profit he’d have made by investing in this FTSE 100 pick pre-pandemic.…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »