At the time of writing, BP trades at 522p with a decent yield of 5.95% and a reasonable price to earnings (P/E) ratio of 13.74. BP’s profits have been rocketing forward from £172 million in 2016 to £9,578 million in 2018.
Here is a key fundamental reason why I have been bullish on oil for over a decade: there is only a limited amount of oil in the world with a fairly consistent rising demand.
BP only needs an oil price of around $40 a barrel to break even. Brent oil is currently trading at $63.32, and has been above $50 a barrel since mid 2017. I firmly believe that oil will eventually reach $100 a barrel again (as it did in 2014) primarily due to supply and demand, which I’ll dive into further in this article.
In addition to this, oil is increasingly difficult for UK companies to obtain. Lord Ron Oxburgh, former chairman of Shell, stated in 2008: “It is pretty clear that there is not much chance of finding any significant quantity of new cheap oil. Any new or unconventional oil is going to be expensive.”
For example, companies will have to either drill hundreds of miles underwater to capture black gold, as BP is increasingly doing in the North Sea, or often attempt to procure it from regions where there are a number of difficulties.
Oil made headline news recently when two British-owned tankers were seized by Iran in the Strait of Hormuz. Geopolitical tensions remain high in this region, which is a further factor that can push prices up.
In terms of increasing demand, I believe that many people underestimate the potential growth of China and India to guzzle oil. Millions more citizens in these nations will have cars in the coming years, I believe, and the vast majority of those vehicles won’t be electric.
BP is being resourceful in finding different forms of energy other than oil. It has paid BHP Group $10.5 billion for its shale assets, and has other renewable assets such as wind power.
Dividends are a crucial part of overall investment returns. So with the company increasing its dividend to 10.25 US cents per share, I will certainly continue to hold BP.
The same is true for Royal Dutch Shell. Currently trading at 2,563p with a decent dividend yield of 5.63%, the worldwide giant has a low P/E ratio of 11.24. Like BP, it is pumping some of its spare cash into buying back its own shares.
Its dividend record is one of the best out there, having not cut its dividend since 1945. Dividend cover is 1.5, higher than BP’s 1.14.
If I had to pick one quality oil producer between BP and Shell, I would opt for the latter: BP is still paying out compensation from its massive oil accident in 2010. Yet I first purchased Shell in 2015, with my last buy on 28 January 2019 at 2,269p. Overall in capital gains I’m up over 30%, plus juicy dividends.
Mark owns shares in BP and Shell. The Motley Fool UK has no position in any of the shares mentioned. 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.