Why The Tipsters Like Royal Dutch Shell Plc Better Than BP plc

Is this a good time to be buying into oil companies, with the black stuff selling for as little as $60 a barrel? The City’s tipsters think it is, and I agree with them — and they do seem to have a clear preference.

Out of a sample of 37 analysts and brokers, there are still five who reckon we should Sell BP (LSE: BP)(NYSE: BP.US), with three of those even on a Strong Sell stance. We do, however, have 13 on the bullish side, but there are 19 who can’t make up their minds.

Gulf fears

There’s most likely still some fear built into the BP recommendations based on the remaining uncertainties around the Gulf of Mexico disaster. The share price is down 9% over the past year to 444p, but a forecast P/E of a relatively high 19 for this year will also put some people off. Dividend yields are penciled in at 5.8%, but that wouldn’t be covered this year and only just next year.

Over at Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US) we see a rosier picture, with only two out of 39 thinking we should Sell, and there’s a smaller proportion sitting on the Neutral fence at 17. And we have 20 putting out Buy or Strong Buy recommendations.

Shell shares haven’t fallen as far as BP’s over the past 12 months, with a drop of just 4% to 2,165p. That leaves them on a forecast P/E of 16 this year, dropping to only around 12 on 2016 forecasts. Dividend yields are similar to BP’s, at 5.6% and 5.7%, but they’re covered by earnings with the mooted 2016 payout covered 1.5 times.

How much are they worth?

Looking at recent price targets, there’s a range for BP of between 410p and 550p with an average of 456p. That’s less than 3% above the the current price, and it’s telling that most forecasters have reduced the target prices since mid-January as fears that low oil price could be here for quite some time grow.

Recent targets for Shell have been lowered too, but there’s an average price target of 2,485p from a range spanning 2,300p to 2,850p. The premium over the current price is significantly higher for Shell, at 15%, and that’s pretty encouraging considering the generally bearish outlook for the oil and gas business right now.

Should we buy

I really do think this is the time to be thinking about buying into a big oil company — be greedy when others are fearful and all that. At the moment I really can’t see much downside at all with Shell, and I reckon the tipsters have got it right.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK 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.