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Is It Time To Sell Royal Dutch Shell Plc And BP plc?

royal dutch shellRoyal Dutch Shell’s (LSE: RDSB) (NYSE: RDS-B.US) shares have really outperformed the FTSE 100 this year, hitting an all-time high of just under £26 each at the beginning of May. However, since then the company’s shares have started to slide, as oil prices fall.

So is it time to sell up before investors turn their backs on the company completely?

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Impressive quarter

Shell’s rally earlier this year was underlined by the company’s impressive second quarter results. Indeed, for the quarter, earnings on an adjusted basis rose by 33% year-on-year to $6.1bn, while production increased 0.5%, to 3,077 thousand barrels of oil equivalent per day.

Further, investors were impressed with management’s drive to improve Shell’s efficiency and profitability. For example, the company continued to dispose of businesses considered non-core during the second quarter, with asset sales during the quarter totalling some $6.5bn, taking the total value of asset sales this year to $8bn. This puts the company in line to achieve its divestment target of $15bn by the end of 2015. 

What’s more, Shell has been streamlining its capital spending program and is cancelling new projects that are unlikely to be profitable for the group, such as the now-aborted gas-to-liquids plant in Louisiana.

Still, Shell is facing multiple threats over the next few months. These include a falling oil price, troubles at its North American operations, and the effect of sanctions Russia, which could impact Shell’s business within the country.

That being said, for long-term holders, Shell remains an attractive investment. The company currently trades at a lowly forward P/E of 11 and supports an attractive 4.3% dividend yield, covered one-and-a-half times by earnings.

Russian troubles

Shell’s peer, BP (LSE: BP) (NYSE: BP.US) has not had such a good start to the year. Unfortunately, BP’s shares have fallen over the past six months as investors become increasingly concerned about BP’s exposure to Russia.

Indeed, a key part of BP’s business is its near 20% share of Russian oil giant Rosneft. Rosneft has been a target of international sanctions aimed at Russia and over the long term, these pressures could really hurt both Rosneft and BP.

What’s more, analysts are becoming increasingly concerned about Russia’s unpredictable actions. There is now a very real threat that BP’s share of Rosneft could be confiscated by the Russian state. 

For BP, the nationalization of its Rosneft stake would be crippling. Rosneft plays a large part in BP’s global business plan, as the British oil giant receives both dividends and a proportion of profits from Rosneft. In total, Rosneft contributed over $1bn to BP’s underlying $3.6bn second-quarter earnings. 

At the end of July, BP’s share in Rosneft was valued at $13bn, or £7.8bn — that’s around 10% of BP’s total market capitalization. If Russia seizes the company’s Rosneft stake, BP’s market value could drop by 10%. So it could be time to jump ship before things get any worse.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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