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Beginners’ Portfolio: I Wish I’d Bought Royal Dutch Shell Plc Instead Of BP plc

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, with all costs, spreads and dividends accounted for. Transactions are for educational purposes only and do not constitute advice to buy or sell.

Back in August 2012 I added BP (LSE: BP)(NYSE: BP.US) to the Beginners’ Portfolio, and I’ve wondered ever since whether Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US) would have been a better choice. At the time, BP was still emerging from the Gulf of Mexico disaster, but I thought most of the damage was out and reasonably well quantified — I underestimated that for sure, but that’s not the only reason that Shell might have been a better buy.

BP shares have done better

In fact, over the past 12 months BP shares have been the better performer of the two, with only a 0.5% fall to 469p compared to a 14% fall at Shell to 2,060p. Shell shares slumped by 9% on the day the firm’s recommended takeover of BG Group (LSE: BG) was announced, despite my thinking that it’s a good move.

BG shares, on the other hand, climbed by 27% on the day, so it’s clear which set of shareholders are happier with the bid so far. The deal is worth 383p in cash plus 0.45 Shell B shares per BG share, valuing BG shares at 1,300p apiece based on current prices, compared to a pre-bid price of only 910p, so the uptick is understandable — and the premium is surely what Shell needed to offer to get the bid recommended by the BG board.

But with BG shares having been forced down with the rest of the sector since the oil price has been slumping, I still think Shell is getting a good deal even at that price.

Consolidation has been hanging in the air since the black stuff slid so low that even the big operators had to start mothballing some assets as unprofitable at today’s sub-$60 crude price, but at the same time it’s left them with the possibility of snapping up some long-term undervalued assets at relatively knock-down prices.

Beefed-up reserves at a good price

Shell has, in one action, increased it reserves by 25% and its production capacity by 20%. Some of that is in liquified natural gas, which is a key product for Shell — and it will now be the world’s biggest player. That’s a lot less risky that finding the stuff for yourself, but the wisdom of the move does depend on the price.

Fool analyst Nathan Parmalee has estimated the cost to Shell of BG’s proven reserves at around $20 a barrel. He’s right that it’s arguable whether that’s a great price in the short term, and it’s possible that there were reserves out there to be had for less. But when oil was up around $100 it would have been seen as a steal, and I think its more important to focus on getting a good price rather than pushing for a great price and risk losing the opportunity altogether.

In addition, there should be considerable cost saving to be made in combining the two company’s operations, at a time when reducing costs is key to coming out ahead.

Shell’s better for newcomers

Right now, Shell is offering a 6% dividend yield if forecasts are to be believed, and that’s ahead of BP’s 5.5% — and at a lower prospective P/E. Both dividends were perhaps looking a little stretched, but Shell’s looks safer now after the BG deal. I reckon strong dividend income is what beginners should be focused on now, and if I was choosing a big oil company for the portfolio today it would be Shell, not BP.

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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.