Why I Wouldn’t Buy BP Plc, BG Group Plc & Royal Dutch Shell Plc Right Now

It is safe to say that oil stocks have suffered a painful end to 2014.  Things didn’t get much better as 2015 rolled in.  The price of oil crashed, with some predicting prices varying between $20-$30 per barrel of brent crude.  As it happens, brent crude is currently hovering around $60 per barrel — touch wood, it seems to have found a level here.  So, what can we expect from these three integrated oil majors: BG (LSE: BG), BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB)?

Will The Oil Price Recover?

Clearly, this is the most important piece of the puzzle.  The answer is simply that no one knows.  Personally, I don’t listen to pundits either way.  The price is what it is, and one should take a view based on where we are today.  In the long run, the price will be determined by supply and demand.  It is quite possible that we could see $60 oil for some time — if there is a downturn, however, we could see prices move south from here.  Of course, the opposite could be true should the recovery be sustained and wide-reaching, as demand would usually increase in such circumstances.  In addition, a lot depends on how OPEC reacts to the price movement, but with the next meeting not scheduled until June 2015, speculators will continue to… well, speculate.

Is Consolidation On The Cards?

Depending on how you view the current investment landscape, there is always the possibility of consolidation, which could mean that large- and mid-cap stocks go on the hunt for smaller companies with a particularly attractive asset.  However,  BG will be cutting its capital expenditure by almost a third this year, BP said that it will reduce spending to $20 billion and Shell will make reductions of $5 billion per year over the next three years.  So, at a time when one could argue that there are attractive assets for the taking right now, one wonders whether CEOs will pounce before they see a recovery under way.  Additionally, we could witness a mega-merger — imagine a BP and Shell combining!  Personally, I think that this comes with substantial risks and is unlikely to occur.

Are The Dividends Safe?

If I were a betting man, I think that it would be easier for BG to cut its dividend.  Out of the three companies, it is considered as more of a growth stock.  The new CEO could seize the initiative in order to reduce the net debt of around $12 billion.  On the other hand, Shell has not cut its dividend since the Second World War and is expected to maintain its dividend for this year, thus giving a prospective yield of over 6%.  Not far behind is BP, yielding around 6% — we now have some closure on the tragic accident in the Gulf of Mexico.  The final bill expected under the Clean Water Act will be limited to $13.7 billion, some $4.3 billion less than the $18 billion that was being sought by the US authorities.

What’s My Take?

Well, the average price of oil in the final quarter of 2014 was a good 25% higher than the likely average price in the first quarter of 2015.  This makes things difficult to predict going forward for investors and analysts alike.  Personally, I would be waiting to see how the results shape up before making a purchase.  Any nasty surprises could leave you counting the cost.

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Dave Sullivan 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.