The coronavirus pandemic has triggered an unprecedented slump in demand. This has seen oil prices fall by nearly 60% in 2020.
Right now, investors are scared the economy won’t recover. If you’re thinking about buying Shell and BP shares, you may be worried that these firm’s 11% dividend yields will be cut. I don’t think this is likely. In my view, both companies offer good value at current levels.
Record cuts to oil production
BP shares rose briefly before Easter when Saudi Arabia and Russia agreed a record-breaking deal to cut global oil production by 9.7m barrels per day — almost 10%.
Alongside this, higher-cost oil producers — such as US shale operators — are expected to be forced into further cuts by low prices. OPEC estimates suggest the total reduction in global oil production could be 15%, or even more.
However, oil prices haven’t risen since the cuts were announced. Both the Shell and BP share prices have drifted lower again. This suggests to me traders are worried that even these cuts won’t be enough to offset lower demand.
Lockdowns will end
It’s too soon to say how oil supply and demand will change over the next few months. But one thing I think we can be sure of is that the lockdowns currently in place all over the world will eventually end.
At some point, I think the advantages of reopening the economy will be greater than the health benefits of keeping it closed.
Most Asian countries are now unwinding their lockdowns. Many European countries are also making plans for businesses and schools to reopen. By the end of May, I expect that most other countries — including the UK and the US — will be starting to exit from lockdown.
BP and Shell have both announced short-term financial measures which should protect this year’s dividends. These companies routinely plan for many years ahead and have managed many market crashes. I think Shell and BP shares could perform well in a recovery.
BP shares have always risen from this level
We’re not technical analysts here at the Motley Fool. But when the BP share price has fallen below 400p over the last 20 years, it’s always rebounded strongly.
The same has been true when the Shell share price has dropped below 1,500p.
I can’t guarantee these FTSE 100 stocks will bounce back again in 2020/21, but I think there’s a good chance they will.
11% dividend yields look safe to me
Around one-in-three FTSE 100 companies have now suspended their dividends for this year. Some have even cancelled planned payments for 2019.
So far, Shell and BP shareholders have been spared. Both companies have announced spending cuts and substantial unused loan facilities. These should provide the liquidity they need to operate normally this year and pay unchanged dividends.
Although I can’t rule out the risk of a cut in future years, I think 2020 looks pretty safe. I rate Shell and BP shares as a buy at current levels.
Roland Head owns shares of Royal Dutch Shell B. 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.