Are Royal Dutch Shell Plc And BP plc Screaming Bargains As Prices Plunge?

For Royal Dutch Shell Plc (LON: RDSB) and BP plc (LON: BP), is the only way up?

| 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.

As an investor, how often do you dream of being able to buy a top FTSE 100 company at a 52-week low, on a price that has slumped by 25% over the past 12 months? Well, if you glance at Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US), that’s exactly what’s on the table with the shares at 1,878p.

Over at BP (LSE: BP)(NYSE: BP.US), the shares are actually a little up since their low point in December last year, but we’re still looking at a 15% fall over 12 months and a definite downturn since mid-April.

Buy when others are fearful

One of the best things you can do as an investor is buy into long-term resilient sectors when they’re irrationally depressed — and when the whole market is dragged down by eurozone political worries, so much the better.

If you’d bought shares in the big banks in the depths of the financial crisis, you could be up 460% on Barclays today, or up 270% on bailed-out Lloyds Banking Group in less than four years.

And if you’d invested in the UK’s biggest housebuilders, well, you’re probably more likely to be sunning yourself on a beach somewhere than listening to me banging on about buying big oil shares — after all, if you’d bought Barratt Developments five years ago your investment would have nearly five-bagged today.

So what is it that makes our two big oil companies attractive right now? I’m no good at timing markets, but decades of experience have taught me that if you can get close to the point of maximum pessimism for a sector, you’ll do well. Was the point of maximum pessimism for oil stocks coincident with crude oil at less than $50 a barrel in January this year?

Now could be the time

No, it wasn’t, because many correctly saw that as unsustainably low because of the actual costs of extracting the stuff, and the world has since settled on a price range of $60-65 a barrel as a balance between demand and sustainable production. In the long term it’s anybody’s guess, but oil demand is actually still rising, and I can easily see a sustainable medium-term crude price of around $70-75 a barrel — much beyond that and fracking starts to look attractive again, and that would seriously mess with the demand/supply balance.

There’s obviously always a risk, and I’m definitely a bit twitchy about dividends right now. At Shell we have tasty yields of 6.5% forecast for this year and next, but that would be barely covered by 2015 earnings forecasts — cover would rise to 1.35 times a year later, but there’s still not much of a safety cushion there. At BP we’re looking at mooted yields of closer to 6%, with the 2016 payout expected to be covered only around 1.2 times.

Dividend cut?

Might there be a cut? There might indeed, but we’re still looking at 2016 P/E valuations of 11 for Shell and 13.5 for BP. Maximum pessimism? Can’t tell, but they’re both clearly in misery-guts territory to me.

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 recommended shares in Barclays. 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

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »