It has been a brutal couple of months for the oil price, and for FTSE 100 oil giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB). At one point in September, Brent crude was topping $80 a barrel, at time of writing it stands at just $54.25. That’s a drop of a third and many believe it could fall lower still in 2019.
The impact on BP and Shell’s share prices has been predictable. Despite a small recovery in the past week, BP is down 17% from its 52-week high trading at 501p, while Shell is down a similar percentage to trade at 2,330p.
This is yet another disappointment for long-term BP investors in particular, as its share price looked like it was finally about to reach pre-financial crisis highs of 600p. Those holding Shell will also feel frustrated, as the good times looked set to roll after the last oil price shock, which saw it plunge below $30 in January 2016. Three years later are we heading there again?
At the Fool we really like to buy stocks like BP and Shell when prices and sentiment are down in the dumps, as they are at the moment. That way you can pick up your favourite companies at reduced prices, then hold on and wait for them to recover.
It was a strategy that worked last time oil was on the rack: despite this year’s share price slippage, BP still trades around 45% higher than it did in January 2016, while Shell is up around 50% over the same period. Plus you will have pocketed their juicy dividends on top. Or better still, reinvested them to buy more stock.
Both companies weathered the last oil slump pretty well, given the pressure they were under. Both continued to reward loyal investors by maintaining their generous dividends, with Shell keeping up its proud record of never dropping its dividend since the war.
BP can now cover its production expenses with oil below just $50 a barrel, and is aiming to reduce its break-even point to between $35 and $40 per barrel by 2021, by cutting costs and writing off poorer performing wells. This gives it turnaround potential. Shell is already below $40 a barrel. If this was not the case, their share prices would have fallen even further.
The big question is where does the oil price go next? It could slip further in January as US crude oil stocks have jumped from 400m barrels to around 450m, but that trend may soon start to reverse. At these prices, US shale drillers will see their margins pared to the bone, which could cut supply and ease the glut.
The full impact of Iran oil sanctions will be felt by April, when at least a million barrels will be taken from the market. Opec and Russia may also agree to reduce output. If all this happens, the oil price could recover as rapidly as it fell, and now could be the perfect opportunity for long-term investors to lock into BP and Shell’s sky-high yields of around 6% a year.