The worrying situation in Iran and the escalating tensions in the Middle East have pushed up oil prices around the world. Investors who bought energy shares over the past few months are sitting on handsome gains, but here at the Motley Fool, we like to take a longer-term view of investing
It’s worth noting that the price of oil has only shifted along with investor sentiment but for the moment, the supply-demand dynamics of the actual commodity remain unchanged. This means the price could escalate much higher if the supply chain is disrupted or certain countries start hoarding oil strategically.
In this scenario, I believe two FTSE 100 energy companies could be more in demand, but I like them now for their high yields and determination to become more efficient businesses.
Royal Dutch Shell (LSE: RDSB) shares have gained nearly 3.9% over the past five days in response to the current situation, but I have to say that I feel it deserves to trade higher anyway. The oil giant was clearly trading at a discount not too long ago. Now the price has caught up to the behemoth’s long-term fundamentals, while the dividend yield remains impressively high at 6.2%.
After a year of selling off assets in the Middle East and tightening its belt in anticipation of lower oil consumption, Shell is now a much more efficient energy producer and distributor. My Fool colleague G A Chester forecast 25% earnings per share growth and a price-to-earnings growth (PEG) ratio of 0.4 for 2020.
However, he made his predictions in mid-2019. Since then, the price of oil has moved higher while the number of Shell shares outstanding has dropped as a result of buybacks. The company’s cash flow for 2020 could be higher than anticipated. In other words, the shares are more valuable now, making it the perfect time to add this heavyweight to your watch list.
BP (LSE: BP) is another key beneficiary of higher oil prices. The shares are up 6.4% since the start of the year, while the dividend yield remains attractively high at around 6.5%.
My Fool colleague Paul Summers estimated a dividend of 32p for 2020, which he says is covered 1.4 times by estimated earnings for the year. However, he made those predictions when the price of Brent Crude was hovering around $64, while the current price is nearly $70.
In other words, BP’s growth and dividend coverage could be better than expected, making the share an undervalued income opportunity for yield-hungry and risk-averse investors like me.
What I like about BP, beyond its robust dividend and attractive valuation, is the fact that it is also transitioning to a more diverse business model by adding renewable energy to the mix. The company is already one of the largest natural gas suppliers in the world and has deployed hundreds of millions into acquiring wind farms across the US.
Oil and gas giants like Royal Dutch Shell and BP are in an interesting position in 2020. They’ve spent years reducing their costs and making their operations efficient and when the oil price rises, they benefit. We all hope the conflict with Iran can be resolved soon and even if the oil price dips again, I still see these two firms as worthy investments.
VisheshR has no position in any of the shares mentioned. 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.