Should you buy Big Oil in the wake of Brexit?

Oil majors BP (LSE: BP.) and Royal Dutch Shell (LSE: RDSB) have surged higher since the EU Referendum result. Here are five reasons why the oil giants may continue to outperform amidst Brexit-related market volatility.

Uncertainty protection

It’s been a roller coaster ride for many UK stocks since the Brexit result. However, after the immediate panic driven sell-off, there’s been a huge bounce in the share prices of many FTSE 100 stocks. There’s a clear strategy at play here. Investors have sold out of companies heavily exposed to the UK economy and redistributed the funds into large multinational stocks whose earnings are less affected by the Brexit fallout. With BP stating that it didn’t expect Brexit to have a significant impact on its business or investments in the UK and Continental Europe, the oil majors have attracted interest as an investor safe haven. 

USD earnings provide a hedge

It’s no secret that sterling has suffered significantly in the post-Brexit turmoil, falling from close to $1.50 pre-Brexit, to $1.33 today. While the pound’s decline is bad news for anyone planning a holiday in Florida, it’s good news for UK-based shareholders of BP and Shell. That’s because both companies report their earnings and value their assets in US dollars, so a stronger dollar means better results in GBP terms. Clearly, many investors are viewing the oil majors as a hedge against the declining pound.

Boost to dividends

Furthermore, weak sterling is favourable for UK income hunters. As BP and Shell also announce their dividends in US dollars (BP: $0.40/share, Shell: $1.88/share), this means higher dividend payouts for UK investors. At the current exchange rate, both companies are yielding a huge 6.8%. While neither dividend is well-covered with the oil price having fallen significantly in the last two years, the majority of sell-side analysts don’t expect either company to cut dividends in the near term. With such formidable yields, BP and Shell are likely to prove very popular for UK income investors, especially in the face of a potential UK interest rate cut.  

Oil price bounce

It’s been a wild ride for the oil price over the last 24 months, with the price of black gold falling from over $100 per barrel in mid 2014 to below $30 earlier this year. This dramatic fall unnerved global markets and sentiment turned against oil stocks.

However, in the last six months oil has bounced back to around $50 per barrel and at this price, while it’s unlikely we’ll see big profits from the oil majors, it’s also unlikely that we’ll see the doomsday scenarios that were being touted back in January.

The trend is your friend

With the resurgence in the oil price the short-term trend for the oil majors now appears to be up.

After falling below 1,300p in January, Shell has staged a huge comeback to trade above the 2,000p mark for the first time in 12 months and BP has recovered to 445p after falling to within touching distance of 300p in January. Year-to-date Shell and BP have returned 41% and 31%, including dividends, respectively.

There’s clearly momentum here and assuming the oil price doesn’t capitulate again, I believe the oil majors should continue to benefit in the face of Brexit-related uncertainty.

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Edward Sheldon owns shares in Royal Dutch Shell B. The Motley Fool UK has recommended 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.