BP plc Squares Up To Royal Dutch Shell Plc For Oil Supremacy

The oil & gas business has been in the news of late, thanks to legal developments concerning BP (LSE: BP) (NYSE: BP.US) and the Gulf of Mexico, so it seems like a good time to take a look at the sector.

Here’s how the four oil & gas producers in the FTSE 100 are looking right now:

  BP Shell BG Tullow
Market cap £86.5bn £156bn £40.3bn £6.35bn
EPS change 2013 +114% -39% 0% -73%
P/E 6.4 13.9 16.4 74.7
Dividend Yield 4.7% 4.9% 1.4% 1.4%
Dividend Cover 3.35x 1.48x 4.47x 0.94x
EPS change 2014* -37% +40% -14% +26%
P/E 9.8 10.8 17.2 48.1
Dividend Yield 5.1% 4.4% 1.5% 1.6%
Dividend Cover 2.03x 2.05x 3.70x 1.23x
EPS change 2015* +8% +2% +13% +91%
P/E 9.1 10.6 15.2 25.2
Dividend Yield 5.3% 4.5% 1.7% 1.6%
Dividend Cover 2.08x 2.03x 3.79x 2.33x

* forecast

Exploration risk

Tullow Oil (LSE: TLW) is by far the smallest of the four, but as a dedicated explorer it’s a different kind of company — and it doesn’t make much sense to try to value it on the usual short-term metrics like P/E and dividend. The share price has not done well this year, losing more than 30% over six months to 708p while the FTSE has gained a few percent.

But the chart has been a spiky one, and over 10 years Tullow shares have more then five-bagged — even if they’re down over the past five years. If you know how to value oil explorers you might find value in Tullow. But I don’t, so I’m out.

oil rigBG Group (LSE: BG) is an interesting proposition, as it also operates as liquified natural gas (LNG) shipping and marketing division — and is, in fact, the largest supplier of LNG in the USA. I’m impressed by BG, and with its undemanding P/E and growth potential I think the shares are reasonable value after dropping a couple of percent to 1,181p over 12 months.

The big two

But from a mature sector like this, I want to see dividends, and so for me the choice is between BP or Royal Dutch Shell (LSE: RDSB). And that  comes down to how badly the oil spill developments are going to go.

BP has been judged to have been “grossly negligent”, which could lift its fine from $1,100 per barrel spilled had it been merely “negligent” to $4,300. There are disagreements over the size of the spillage too, but the maximum fine could be as high as $18bn where BP had only set aside $3.5bn.

The company will appeal the ruling, but the fear is that if extra cash is needed then the recovering dividend could be cut. I think that’s unlikely, as the legal process will surely drag on for a years yet and there’ll be plenty of time to find the cash.

A tough choice

But I’m not sure if there’s enough safety margin in BP’s better dividend prospects and lower P/E to compensate for the extra risk, even though the share price has only gained 5% over the past 12 months to 470p — Shell is up 15% to 2,479p.

Between BP and Shell then, I honestly can’t choose — it’s up to you.

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