The price of crude oil has continued to rise over the past few weeks, mainly because of OPEC’s decision to not relax supply curbs. Indeed, the crude price has now climbed to nearly $70, over three times larger than this time last year. Of course, oil stocks around the world have benefited from this, and this has included both BP (LSE: BP) and Shell (LSE: RDSB). With demand starting to pick-up, some also hope that the price of oil can rise further. But with the pandemic still offering problems, and concerns over the longevity of many of these oil stocks, what am I doing now?
Royal Dutch Shell shares
The year 2020 was not a pleasant one for Royal Dutch Shell. Its full-year earnings demonstrate this point, with a loss of over $21bn. This loss was largely attributable to the second quarter, where the company recorded a $16.8bn impairment charge. On top of this, like many other European oil stocks, Shell has had to cut its dividend.
Nevertheless, while evident that the pandemic has hit Shell hard, I can still identify some positives moving forwards. Firstly, the company was able to slash its operating expenses by 12% and there may be opportunities to do so further in the future. This may help the company become more profitable in the long term. Secondly, Shell has demonstrated a commitment to renewable energy. Its deal to buy Ubitricity shows this, and it may help soothe shareholder fears that the company is not adapting to the future. Finally, there is also scope for the dividend to rise. Indeed, in its third-quarter trading update last October, it raised the dividend by 4%. If results can continue to improve, I believe that the company will attempt to return more money to shareholders.
Due to these slightly improved fortunes, I’m holding on to my Shell shares for now. This is despite the number of hurdles that the company is facing, including the fact that its net debt is over $75bn. For a company struggling for profitability, this may hinder the transition into renewable energy and the ability for the oil stock to return significant money to shareholders.
Oil stock transitioning into renewable energy
In comparison to many of the other oil stocks, BP has announced a quicker transition into renewable energy. In the long term, I am confident that this can help boost profits and increase the longevity of the company. However, it will also take time to generate profits from this part of the business.
There is also the issue of debt. Currently, net debt stands at $39bn and this is expected to further increase in the first half of 2021. This is due to severance payments, the annual Gulf of Mexico oil spill payment and completion of the offshore wind joint venture with Equinor. This increases the urgency for BP to grow operating cash flows and is mainly contingent on high oil prices.
But I am confident in the future of BP shares. Management looks strong enough to drive through the transition into renewable energy and the current high oil prices should also help. I’m therefore keeping my BP shares.
