Should you buy BP plc or Royal Dutch Shell plc?

BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) are two of the most popular FTSE 100 stocks in London. As oil majors both companies are heavily linked to the oil price and have performed well this year. The outlook for oil is looking significantly better than a year ago and I believe both stocks should perform well over the next five years. 

British giant

BP has been under pressure ever since the Deepwater Horizon oil disaster in the Gulf of Mexico. The recent oil price collapse came at a time when the company was in a good position to get back to growing the business. The company has struggled in the last year due to the lower oil price and it was widely expected to see it cut its dividend. This hasn’t materialised as of yet and BP still pays a fantastic dividend and yields around 7%. But the company has dividend cover of only 0.45 and I think this opens the door to a dividend cut if the oil price falls again. 

BP has some extremely high quality assets around the world that it’s beginning to focus on. The company is forecast to make £6bn of profit in 2017 after aggressively cutting costs and improving operational efficiency. If this target is hit it would be quite an achievement for the management team. BP is obviously a leveraged play on the oil price and is up over 10% since 1 January. Yet I think BP shares may well underperform their peers in the future as there’s no obvious strategy at work. 

Shell’s clear plan

I was very impressed with Shell’s forecasts and presentation from the capital markets day earlier in June. The company plans to cap spending, drive costs lower and sell non-core assets. Management say this strategy will mean that in 2020 the company could see $25bn of organic cash flow. This will be used to reduce debt, pay dividends and as capex for exploration/development plans. This giant company is becoming more streamlined, focused and flexible. It looks like the BG Group takeover has the potential to be a fantastic piece of business as the company is expecting further synergies from the acquisition. The acquisition of BG’s deep water assets in Brazil is set to boost production. Even after the recent rally, the stock still trades with a dividend yield of 6.8% and in my opinion the dividend won’t be cut. 

I own shares in Royal Dutch Shell and remain an oil bull but I wouldn’t look at buying any BP shares yet. In my opinion, Shell has outlined a clear strategy over the next few years and the BG acquisition looks like it was a great deal for Shell. This difference is illustrated in the performance of BP and Shell shares this year. Shell has outperformed BP by over 11%. 

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Jack Dingwall has shares in Royal Dutch Shell. The Motley Fool UK has recommended BP and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.