Are oil shares Shell and BP good buys now after the FTSE 100 drop?

Last week oil prices turned negative. What should we do in this situation? Anna Sokolidou digs deep to find out.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We live in strange and uncertain times. Not only has the coronavirus pandemic affected so many people’s health and lives, it has radically changed our lifestyles. Many of us now work from home and are unable to travel. As a result of this, and other issues such as the general oil glut, we saw negative oil prices last week, an unprecedented market situation. So should FTSE 100 investors buy oil companies now? And which firms should they buy? Well, the top UK companies in the field are Royal Dutch Shell (LSE: RDSB) and BP (LSE:BP). 

Oil prices 

First, I would say I agree with my Foolish colleague Matthew Dumigan on the prospect of the V-shaped recovery. Covid-19 quarantines must end at some point. European countries are slowly opening up some businesses, and the UK’s chief medical officer says the country has probably reached its peak in new Covid-19 cases. As a result, the demand for oil should recover.

Let’s be realistic — it won’t happen overnight. Yet negative oil prices are definitely not here to stay. So what do I think is the best approach to buying oil stocks? Investors planning to bet on these developments should choose the largest, most reliable companies, I feel. To me that means Royal Dutch Shell and BP, the largest (by far) on revenue.

Both shares are trading at multi-year lows, although this could change for better or for worse with Shell scheduled to report its first quarter results on the April 30 and BP on May 5. Earnings are expected to be much lower compared to the first quarter of 2019 due to the oil price weakness. But at the same time, the earnings announcements might be a wonderful opportunity to stockpile these shares. 

Royal Dutch Shell

Credit rating agency Moody’s has affirmed Royal Dutch Shell’s Aa2 rating which is exceptionally high. However, the agency changed its outlook to negative due to a lot of uncertainty around Covid-19. The agency believes Shell management is right in planning $3bn-$4bn in cost cuts over the next 12 months. Moody’s also thinks cutting cash capital expenditure or fixed investments by $5bn would help. Importantly too, Shell has decided to suspend its buyback programme. This would obviously put some pressure on the company’s share price, but these measures should help the company work through the current oil price collapse. Its class A shares trade at the record low price-to-earnings (P/E) ratio of 7. The dividend yield is 11%.

BP

BP is facing a similar problem. However, Moody’s is slightly less optimistic about its financial position. The agency affirmed its A1 credit rating, also a good investment grade rating. Nevertheless, Moody’s main concern is BP’s rising debt level. At the end of 2019 BP’s adjusted debt was $97bn. This is about $20bn higher than before the last oil price fall in 2014/15.

On the other hand, the agency is optimistic given that BP has diversified, large-scale operations. This was partly helped by buying a 19.75% stake in PJSC Rosneft Oil Company. No company is too big to fail, but BP does come close. BP’s P/E ratio is just over 19, whereas its dividend yield is 10%.

Now what?

Given the pluses and minuses, I think that oil shares are good buys now. I’d prefer to buy Shell rather than BP because of Shell’s better financial position and lower P/E ratio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »