September was a poor month for oil stocks. Shell (LSE: SHEL) fell by around 10%. Meanwhile, BP (LSE: BP.) shares declined approximately 9%.
Is now the time for investors to consider buying these oil stocks? Let’s discuss.
Why have these shares fallen?
The reason these shares fell last month is that oil prices were weak.
On 10 September, oil crashed to its lowest price all year due to concerns over global economic conditions (a weak economy can mean less demand for oil).
Oil prices then fell again late in the month after Saudi Arabia said that it is planning to ramp up its oil production and that it is ditching its target for $100 per barrel oil (i.e. it’s expecting lower prices).
As I write this, Brent crude oil is trading at around $71 per barrel. That’s about 22% below its 2024 high of $91.
This kind of oil price weakness is a key risk when it comes to these Footsie stocks. Ultimately, their earnings, cash flows, and share prices can be majorly impacted by oil prices – which are notoriously volatile and unpredictable. The way I see it, oil stocks are quite speculative in nature because no one really knows what profits are going to look like in the future.
Are the stocks cheap today?
Is there any value on offer today? Possibly. At first glance, the shares do look cheap.
Currently, BP has a forward-looking price-to-earnings (P/E) ratio of 7.6 while Shell trades at 7.8 times this years’ expected earnings.
It’s worth noting, however, that in this sector P/E ratios aren’t very reliable indicators of value. Given that earnings can fluctuate heavily, earnings forecasts can move around from year to year and also be significantly off the mark at times.
Healthy dividends yields on offer
We can look at dividend yields, however. And right now, these are relatively attractive. At present, BP sports a trailing yield of 5.4% while Shell shares are offering 4%.
That yield from BP looks quite tasty. If my investment goal was income, I could be interested in the dividend from the stock. Of course, dividends are never guaranteed and BP has slashed its payout in the past.
Additionally, dividends from these shares are in US dollars. If the pound keeps rising, it will translate to less income for UK investors.
Better stocks to buy for the long term?
At the end of the day, though, the issue of whether to buy or not really comes down to one’s outlook for oil.
If oil prices rebound, these stocks could do well in the medium term. If oil prices fall or remain static, these stocks could underperform.
Personally, I don’t have any idea where oil is going next as I’m not an energy expert (and even experts struggle to accurately forecast oil prices). Goldman Sachs has an average 2025 Brent crude oil price forecast of $76 per barrel, which is about 7% higher than current levels. Citi, on the other hand, expects Brent crude prices to fall to $55 per barrel by late 2025 (23% lower). That’s a big difference!
Given the uncertainty here, I think there are better (more predictable) stocks to buy for my investment portfolio.
