The oil price is sliding again, and BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) are watching their share prices slide with it. Until recently, these two companies were the two most profitable stocks on the FTSE 100. Their fall from grace has been rapid and traumatic. Is now the time to boot them out of your portfolio for good?
BP and Shell have been poor investments for years. Their troubles began before the pandemic. But Covid-19 has made life a lot, lot harder. Their share prices have crashed by more than half in the past 12 months.
BP’s market-cap has now fallen below £50bn. Shell’s stands at £80bn. That’s still pretty big, but Unilever (£125bn), AstraZeneca (£115bn) and mining giant BHP Group (£86bn) are now all bigger.
Oil and gas producers have performed worse than any other FTSE 350 sector over the last 10 years, according to AJ Bell.
Oil price may rebound
In June 2015, a barrel of Brent crude traded at a pricey $115. The oil price dipped below $30 the following January, but normal service appeared to be resumed as it headed above $80 over the next two or three years.
We now have no idea what normal service looks like as the world tries to wean itself off fossil fuels, which could leave both BP and Shell sitting on a massive pool of stranded assets.
They’re desperately trying to reinvent themselves as a result. New BP boss Bernard Looney started his tenure in February by calling for a rapid carbon transition to net zero. Last month, he said oil and gas production would drop by 40%, or 1m barrels of oil equivalent per day, over the next 10 years. Hydrocarbon revenues will be an “engine of value creation” that would help fund the shift into low carbon investments.
Shell aims to cut its net carbon footprint by 65% by 2050, by switching to renewables, biofuels and hydrogen. The irony is that falling oil revenues will deprive both companies of the revenues they need to fund the switch.
Fallen FTSE 100 heroes
AJ Bell investment director Russ Mould says consensus forecasts assume BP and Shell will generate 7% of total FTSE 100 profits and 11% of dividend payouts next year. That’s a far cry from 2005, when they generated an astonishing one-third of profits.
That figure alone suggests you should reset your sights on what these two companies can do for you. They aren’t the forces they were.
When the lockdown finally ends, energy prices should rebound but even then there seems to be a limit on how high they can go, thanks to Permian shale. Although there’s a chance supply could shrink as companies shift out of oil, pushing up the price.
Despite the oil price crash, I wouldn’t write off BP and Shell yet. Now could be the time to get greedy when others are fearful.
Not too greedy though. The world is changing…
Harvey Jones 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.