2020 has been a rough year for oil companies globally. A fatal combination of the coronavirus pandemic, the stock market crash and the price war has left oil stocks such as BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) in tatters. Combine this with a shaky oil market, and it’s clear to see why investor sentiment toward the supermajors has deteriorated.
However, what about the long-term prospects for these companies? Well, as you may know, here at The Motley Fool, we place a great deal of emphasis on long-term investing. So, looking ahead, where could the BP and Shell share prices be 10 years from now?
The future of the oil industry
Taking a macro view of the industry in which these two companies operate is key to determining their future prospects. In a world where environmental concerns are of paramount significance, the oil industry is not particularly looked upon favourably. On top of this, demand for oil has fallen substantially over the period of the pandemic, with widespread lockdowns taking their toll on consumption.
While oil is likely to remain a large and important part of the broader energy mix for the foreseeable future, the long-term outlook for the industry is far from certain. In any case, oil exploration is an expensive and risky business that requires monumental investment. It’s also a business that faces less incentive to operate the lower the price of oil is.
The focus for many is now firmly upon seeking to develop lower-carbon technologies and renewable energy alternatives. How successful this will be remains to be seen. Nevertheless, I think both BP and Shell would do well to position themselves wisely to capitalise on these shifting trends.
Diversification towards renewables
In recognition of the fact that oil prices look set to be lower over the long term, both BP and Shell have reduced the value of their assets, particularly those related to exploration. The revised price forecasts illustrate that both businesses are gearing up to face weaker demand and lower prices in the long run.
Additionally, both have taken huge steps in the direction of investing in cleaner sources of energy. For example, BP’s flagship renewable project, Lightsource, is focused on the delivery of solar and other smart energy solutions. What’s more, the company is now in possession of multiple wind and biofuel assets. Meanwhile, Shell has been pouring tens of billions of dollars into diversification towards renewables and now has various green energy supply agreements with institutions around the world.
At 305p and 1,224p, both the BP and Shell share prices offer value in my eyes. But, where do I think their respective valuations will be in 10 years? Well, it’s tricky to offer a precise figure. If demand for the commodity recovers to pre-pandemic levels and investment into renewables continues, I reckon both companies’ share prices could rise. Hypothetically, assuming a modest annual return of 5% would result in valuations of 497p and 1,994p in a decade.
Remember though, both companies boast a bulky yield, meaning that dividend payments would significantly swell the size of the investment. As such, through a combination of share price appreciation and dividends, investors in it for the long term could realise an attractive return in the years to come, I feel.
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Matthew Dumigan 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.