Why Royal Dutch Shell Plc Should Beat BP plc In 2015

With BP plc (LON: BP) still struggling after the Gulf disaster, Royal Dutch Shell Plc (LON: RDSB) could come out on top again next year.

| 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.

The price of oil slid to its lowest in five years on 1 December, with Brent crude briefly dipping to $67.53 per barrel — it was up near $115 in June. That’s been hurting the prices of oil stocks — Royal Dutch Shell (LSE: RDSB) shares have fallen 13% since the beginning of July, and BP (LSE: BP) (NYSE: BP.US) is down 20% since its recent high on 26 June.

In the long term oil will surely recover, so is it a good time now to buy Shell or BP? And if so, which one?

Similar valuations

Fundamentally, the valuations of the pair are not miles apart. Shell is expected to see earnings per share (EPS) climb by 33% this year after a 39% fall last year, with a 5% fall penciled in for 2015. Forecasts for BP suggest a 46% fall this year after more than doubling last year, with a small 2% recovery next year.

Forward P/E ratios are similar, with Shell on 9.7 to 10.3 and BP on 9.6 to 9.5. There’s a better dividend forecast for BP, yielding 5.8% to Shell’s 5.3%, but Shell’s cover of 1.92 times edges ahead of BP’s at 1.75 times. But I reckon this similarity in the two companies’ valuations is misplaced, and Shell deserves a higher rating.

At third-quarter time Shell reported a 16% rise in nine-month current cost of supplies earnings to $19,300m, while the quarter itself brought in a 31% rise to $5,847m. At BP we heard of a 59% fall in replacement cost profit to $9,402m (although the underlying fall was said to be only 6.8%). Due to the volatility in the profits of these two companies year-on-year, that alone is not enough to give Shell as big a lead as I think it should have.

The elephant

What does it for me is that old Gulf of Mexico disaster. Every year since what was billed as the largest accidental marine oil spill in the history of the petroleum industry, many of us have thought we’ve had a fair idea of the final bill and that there were no more surprises coming. And every year we’ve been wrong.

The most recent blow was the upholding last month of the earlier “gross negligence” ruling, which should vastly raise the per-barrel penalties and could, according to some commentators, add as much as $15 billion to the total bill.

Too expensive for the risk

And there’s the rub — for me BP shares are just not trading at a sufficient discount to compensate for the ongoing risks associated with the oil spill case, and it’s surely going to drag on for years.

Over the past 12 months Shell shares have beaten BP with a 4% rise against a 12% loss, and I expect that trend to continue at least through 2015.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »