The oil & gas business has been in the news of late, thanks to legal developments concerning BP (LSE: BP) (NYSE: BP.US) and the Gulf of Mexico, so it seems like a good time to take a look at the sector.
Here’s how the four oil & gas producers in the FTSE 100 are looking right now:
| BP | Shell | BG | Tullow | |
|---|---|---|---|---|
| Market cap | £86.5bn | £156bn | £40.3bn | £6.35bn |
| EPS change 2013 | +114% | -39% | 0% | -73% |
| P/E | 6.4 | 13.9 | 16.4 | 74.7 |
| Dividend Yield | 4.7% | 4.9% | 1.4% | 1.4% |
| Dividend Cover | 3.35x | 1.48x | 4.47x | 0.94x |
| EPS change 2014* | -37% | +40% | -14% | +26% |
| P/E | 9.8 | 10.8 | 17.2 | 48.1 |
| Dividend Yield | 5.1% | 4.4% | 1.5% | 1.6% |
| Dividend Cover | 2.03x | 2.05x | 3.70x | 1.23x |
| EPS change 2015* | +8% | +2% | +13% | +91% |
| P/E | 9.1 | 10.6 | 15.2 | 25.2 |
| Dividend Yield | 5.3% | 4.5% | 1.7% | 1.6% |
| Dividend Cover | 2.08x | 2.03x | 3.79x | 2.33x |
* forecast
Exploration risk
Tullow Oil (LSE: TLW) is by far the smallest of the four, but as a dedicated explorer it’s a different kind of company — and it doesn’t make much sense to try to value it on the usual short-term metrics like P/E and dividend. The share price has not done well this year, losing more than 30% over six months to 708p while the FTSE has gained a few percent.
But the chart has been a spiky one, and over 10 years Tullow shares have more then five-bagged — even if they’re down over the past five years. If you know how to value oil explorers you might find value in Tullow. But I don’t, so I’m out.
BG Group (LSE: BG) is an interesting proposition, as it also operates as liquified natural gas (LNG) shipping and marketing division — and is, in fact, the largest supplier of LNG in the USA. I’m impressed by BG, and with its undemanding P/E and growth potential I think the shares are reasonable value after dropping a couple of percent to 1,181p over 12 months.
The big two
But from a mature sector like this, I want to see dividends, and so for me the choice is between BP or Royal Dutch Shell (LSE: RDSB). And that comes down to how badly the oil spill developments are going to go.
BP has been judged to have been “grossly negligent”, which could lift its fine from $1,100 per barrel spilled had it been merely “negligent” to $4,300. There are disagreements over the size of the spillage too, but the maximum fine could be as high as $18bn where BP had only set aside $3.5bn.
The company will appeal the ruling, but the fear is that if extra cash is needed then the recovering dividend could be cut. I think that’s unlikely, as the legal process will surely drag on for a years yet and there’ll be plenty of time to find the cash.
A tough choice
But I’m not sure if there’s enough safety margin in BP’s better dividend prospects and lower P/E to compensate for the extra risk, even though the share price has only gained 5% over the past 12 months to 470p — Shell is up 15% to 2,479p.
Between BP and Shell then, I honestly can’t choose — it’s up to you.
