The Shell (LSE: SHEL) share price jumped 5% in early trading today, with BP (LSE: BP) doing likewise. Anyone wondering why only needs to check the headlines. It’s down to the latest bout of Middle East turmoil.
The FTSE 100’s weighting to oil and defence stocks is its saving grace today. I can say the same about my SIPP. I hold BP and weapons maker BAE Systems, and they’re helping to offset the pain elsewhere in my portfolio. So is this the start of a return to form for BP and Shell?
This surge has also calmed any lingering doubts about my decision to buy BP in September 2024. I stepped in when oil stocks were out of favour and crude was sliding towards $60 a barrel. It’s a cyclical sector, so I bought while sentiment was weak and valuations looked reasonable.
My worry was that Big Oil would remain out of favour as the global economy struggled and the green transition gathered pace (with BP on the sidelines). But I also thought the talk of oil and gas being a stranded asset seemed unlikely. As we’re seeing today, they’re still essential to the global economy. Fears that Iran and its allies could target tankers in the Strait of Hormuz, through which a fifth of global oil supply passes, are enough to jolt markets.
FTSE 100’s saving grace
It’s worth recalling how BP and Shell shares spiked in 2022, after Russia’s invasion of Ukraine forced Europe to scramble for alternative energy supplies. Much of the sector’s underperformance over the last few years reflects the unwinding of that energy shock.
Over five years, BP shares are up a meaty 65% while Shell has surged 112%, with dividends on top. One-year gains are more modest at 10% and 15%, even after this morning’s hop.
Neither company is a pure play on oil prices. They have trading, refining and other operations beyond pumping crude. Even so, in the short term their direction will be shaped by geopolitics. And the risk has just intensified. Expectations of a big oil stock spike may be overdone. Lately, investors have done their best to ignore war talk.
Dividend and growth prospects
At The Motley Fool, we believe investors should buy shares with a long-term view, rather than trying to trade short-term swings. On that basis, I still think both are worth considering. BP trades on a modest forward price-to-earnings ratio of about 13.5, with Shell cheaper still at roughly 11.5.
Income was my main reason for choosing BP over Shell. Its trailing yield is around 5%, beating Shell’s 3.3%. I also felt BP had greater recovery potential, given the corporate mess it had got into. New CEO Meg O’Neill has a major clean-up job on her hands.
Both companies reported in early February and the headlines weren’t great. BP paused share buybacks to strengthen its balance sheet as oil prices softened. Shell missed profit forecasts, yet still generated strong cash flow. It announced a fresh $3.5bn buyback and lifted its dividend by 4%.
These remain risky, controversial businesses operating in a volatile world, and I understand why some investors wouldn’t want to go near them. But from a purely investment point of view I still think BP and Shell merit consideration today, whatever happens next globally.
