In the last month, the Shell (LSE: SHEL) share price has jumped almost 15%. BP (LSE: BP) shares have done even better, rocketing almost 24%. Over three months, they’re up 30% and 40% respectively, and we know the reason why.
The conflict in Iran has sent the oil price soaring from just over $60 a barrel, to $113 at time of writing (31 March). And with no easy end in sight, it could go a lot higher. Gas prices are surging too. Where will this end?
Right now, many will switch on the news and see big oil and gas as a one-way bet. But there are complications upon complications. Events in Iran are impossible to predict. So is the market response to them.
FTSE 100 stars today
If some kind of peace treaty is brokered, the Shell and BP share prices could both reverse, even as oil prices and shortages intensify. Markets are forward looking, and will take a view on how things look likely to stand in roughly nine months time, rather than today.
It’s the same story with the oil price. While the price spike will boost revenues per barrel sold, they’ve got to get those barrels to market. Also, if profits soar while businesses and consumers struggle, panicky politicians could hit Big Oil with punitive windfall taxes.
It can also be dangerous to chase a share price higher. Latecomers could find themselves sitting on instant losses, if the mood changes after they buy. Yet to my surprise, BP shares don’t look too expensive today. The forward price-to-earnings (P/E) ratio is jut 14.6.
The dividend yield has fallen, due to the price spike. But BP shares are still expected to pay income of 4.28% this year, rising to 4.48% in 2027. It halted its generous share buybacks in February, before the crisis.
Shell isn’t pricey either with a forward P/E of 13.5. It’s had a lower yield than BP for some time, and it’s forecast to pay income of 3.19% this year, rising to 3.33% in 2027. It’s still running a $3.5bn buyback programme. Current events could deter another one, as the board may consider it’s not a good look at the moment. That’s me guessing.
Economic opportunities, political threats
When I decided to add an oil stock to my SIPP a couple of years ago, I chose BP for two reasons. First, the dividend yield was much higher at 6%, and second, the shares had taken a beating because of boardroom missteps, including a bungled green transition and reversal. I felt they had recovery potential, if I was patient. I’m happy with my choice today.
There are huge challenges. Climate change hasn’t gone away. But the Strait of Hormuz blockage has shown us one thing. Our world desperately needs fossil fuels. The Gulf conflict may accelerate the switch to renewables, but even then we still need it for fertiliser, feedstock, pharmaceuticals, and much besides. With a long-term view, I think BP and Shell are both worth considering.
But investors watching their shares soar face a terribly choice. A sudden ceasefire could leave them vulnerable. I suggest drip-feeding money, taking advantage of any dips. But only buy with a long-term view, because the short term is unguessable.
