So, the oil price is on the way down again. After breaking through $85 in early October, a barrel of Brent Crude is fetching only about $62 as I write, and that’s below my comfort level of around the $70-$75 mark.
And it could well be set to fall further as fears are growing that production cuts by OPEC won’t be sufficient to deal with the over-supply that the world currently faces. Coupled with bearish stock market sentiment, oil investors could be forgiven for getting a bit twitchy.
I bought Premier Oil shares myself, which I thought might give me a geared play on the oil price, and I’m pleased to see the company chipping away at its debt mountain now that cash is flowing more freely. But the same factors that I hoped would drive the shares upwards with rising oil prices are the same that could see it crushed if oil is in for another sustained fall — and at 77.5p I’m down 20%.
How to play it?
So what do you do if you think oil has a long-term future but want to minimise your shorter-term risk? My approach would be to stick with our top FTSE 100 oil companies, which have proven abilities to make it through an oil price crisis while still paying handsome dividends. That means BP and Royal Dutch Shell (LSE: RDSB).
It only takes a look back over the past five years, which covers the dark days of sub-$30 oil, to see Shell’s resilience. Over that period, Shell shares have gained 14% while the FTSE 100 has managed just 5.6%, but that’s not the end of the story.
Throughout the crunch, the company kept its dividends going, even during the three years when they weren’t covered by earnings — Shell had more than enough cash at its disposal and has a long-term strategy of providing steady returns, which makes it look like a perfect retirement investment to me.
Cracking cash return
And over the past five years, that dividend has accumulated to provide a further return of 34%. That’s a total profit of 48% over the past five years, which included the worst period for oil investment in decades.
Looking forward, earnings are predicted to grow very strongly this year and next, putting the shares on a forward P/E of 12, which drops as low as nine on 2019 forecasts. And the dividend is expected to yield close to 6% per year.
I’ve always seen Shell as essentially a cash-generative dividend stock, which is great for those seeking long-term income. But with a PEG ratio (which compares the current P/E valuation with forecast earnings growth, where lower is better) of just 0.4 for 2019, it’s looking like a tempting growth prospect too.
Growth too?
My Foolish colleague Rupert Hargreaves has recently made a strong case for a potential share price uprating, pointing out that Shell is a considerably more lean and cost-effective company these days after offloading non-core assets and refocusing on its best businesses. And I think he’s right.
I don’t think we are in for a renewed oil price slump, but if we are, then I see Shell’s dividends making it perhaps the best defensive oil investment out there. And if we don’t see a crisis, Shell shareholders could see the value of their shares climbing.
