The Motley Fool

Are BP Plc, Royal Dutch Shell Plc & BG Group plc Worth Holding In Your Portfolio?

BP shares have fallen considerably — but they could still go lower…

Despite total penalties coming in higher than even the most conservative estimate, many shareholders will probably have felt a sense of relief when it was announced this year that BP (LSE: BP) had come to a settlement with US courts over penalties under the Clean Water Act.

These now total $18 billion, with $11 billion charged to the income statement in the first half of 2015, in addition to a further $2.8 billion in business economic loss claims.

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However, what there has been very little coverage of in the financial media is that BP still faces a number of lawsuits in relation to the Macondo spill, the most unsettling of which is a class action lawsuit being brought by the holders of BP’s ADR shares.

This could pose a significant threat to the group’s ability to move on from the 2010 incident and, in all probability, it could also be a source of further downside pressure for the shares during the coming quarters.

Furthermore, the earnings outlook for BP remains bleak, most notably because of uncertainties surrounding future oil prices. In 2014, earnings fell considerably even while the average price at which BP sold oil remained close to $90.

In H1 2015, the fall in Brent crude prompted the average realised price for BP’s oil to fall to $51, in turn driving underlying EPS down by a further 42% to $0.21.

If the price of oil falls further from the current $48 level in the coming months, which it could do, then shareholders could be in for more pain.  

In addition, BP consensus estimates suggest that BP will barely cover its dividend in this year and the next, which means that shareholders will be exposed to the risk of disappointment if the group gets hit with more legal costs or if oil prices take another dive southwards.

This all adds up to too much risk for me and when I consider that, even at 2010 lows, the shares still trade on 14x forward EPS; it becomes a No from me. I’m out.

Shell could be a good long-term play — but the next few years may be disappointing…

Looking at the offer announcement from Shell (LSE: RDSB) in relation to its purchase of BG Group (LSE: BG), it would seem that there is a reasonable amount for shareholders in both companies to be happy about.

This is because, in addition to creating one of the world’s largest oil and gas businesses, the combined group could benefit from an additional $5 billion in annual free cash flow and $2.5 billion in cost savings. Shell management tell us that this will result in a notable boost to earnings from 2018 onwards.

My thoughts on this are that maybe management is right and that, over the long term, maybe this tie-up will be very positive for shareholders in the combined group. After all, they have already made some very alluring promises in relation to dividends and buybacks ($25 billion from 2018).

However, if I were a shareholder in BG, I’d probably be selling up and walking away. The reason being that most of Royal Dutch Shell’s projections assume oil prices which, at best, seem slightly optimistic. Particularly if we consider recent suggestions that Brent could fall as low as $20 per barrel.

The assumed prices in question are $67/bbl in 2016, $75/bbl in 2017 and $90/bbl in 2018-20.

These estimates make a lot of Shell management’s promises, particularly on earnings and dividends, seem like a tall order! 

I’m sorry guys but, once again, it’s going to be a ‘no’ from me. I’m out.

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James Skinner 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.