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£2k to invest? I’d buy the red-hot Premier Oil share price and Royal Dutch Shell

The oil price is rising again, with Brent crude nudging above $70 a barrel. This will alert many investors because where the oil price goes, oil stocks typically follow. Here are two different ways you can play the revival.

Oil plays

With a market-cap of £806m, FTSE 250-listed Premier Oil (LSE: PMO) is a minnow compared to FTSE 100 giant Royal Dutch Shell (LSE: RDSB), at a massive £214bn.

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Smaller often means faster and nimbler though, and that’s certainly the case with Premier’s share price. It has been hitting the gas in recent weeks, rising 40% in three months, against less than 10% growth for Shell. Both stocks have been boosted by this year’s general stock market recovery, fuelled by hopes of a more dovish stance by the Federal Reserve.

Premier performance

Premier enjoyed a strong 2018 with higher production, positive free cash flow, and a return to profitability, turning a 2017 loss of $475.3m into a post-tax profit of $133.4m. It has also been restoring its balance sheet strength, cutting debt by $393m to $2.3bn by year end, a process it plans to continues this year.

It is also pumping out the cash, with flows of 64% to $777.2m last year, boosted by $73.4m of non-core asset disposals. In March, it netted $65.6m from the sale of its Pakistan business. Successful well tests at its Zama discovery in Mexico earlier this month has given it another boost.

Despite this promising trajectory, the stock still trades at just 9.4 times forecast earnings. It was as low as 4 or 5 times earnings before the recent surge, but Rupert Hargreaves reckons its share price could still double from here.

Naturally, you have to factor oil price volatility into this. I’d like to see Premier’s management continue its drive to cut debt to give it more of a cushion. But for now, all looks set fair.

I’m sure of Shell

Although the Shell share price is up by a third over the last three years, this is still primarily a dividend income play. It currently offers a forecast yield of 5.9%, with cover of 1.4, and management can stand tall after maintaining payouts through the recent downturn. Last year’s dividend was funded entirely in cash. Cash flows totalled a hefty $16.7bn in Q4. It’s also operating a $25bn share buyback programme, and has paid $4.5bn so far.

The oil price slump may have worked in Shell’s favour, making it meaner and leaner, and reducing its break-even oil price to $40 or below. That looks nice with Brent above $70, which should continue to boost earnings from its upstream segment.

Royal returns

Shell has also been paying down its borrowings, and at quite a rate, cutting net debt by a whopping $14.5bn to $51.4bn in 2018.

Despite this progress, it trades at just 11.2 times current earnings, against 17.18 for the FTSE 100 as a whole. Today, its shares trade at 2444p, but Rupert Hargreaves reckons they could be worth 3200p, which would represent a 30% uplift from here. However, the real glory is the dividend, which will continue to flow for years. Why wouldn’t you buy it?

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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