Do Crashing Oil & Gas Prices Mean Trouble For SSE plc And National Grid plc?

Will the share prices of SSE plc (LON:SSE) and National Grid (LON: NG) follow the oil majors lower?

| 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.

My daily commute to work means that I need to drive many miles. So, personally, I am delighted that oil prices have been falling. However, for oil companies like BP and Shell, this is less good news.

We have a global glut of oil

The world is drowning in oil. So much so that Goldman Sachs have predicted an eventual oil price of $20 a barrel. We have a global glut of 3 billion barrels of oil.

Why? Because the high oil prices of the past decade have encouraged a boom in oil exploration and development. This means that OPEC producers such as Saudi Arabia and Iraq are pumping as much as they have ever done, the oil majors are extracting oil from Alaska, the Artic and the Gulf of Mexico, and then there is fracking and oil sands.

Should you invest £1,000 in National Grid right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if National Grid made the list?

See the 6 stocks

Moreover, the likelihood is that there will be no rebound in commodities; energy prices are likely to remain low for the next 10-15 years.

It doesn’t take a genius to work out what effect this has on the share prices of oil producers, but what about energy utilities such as SSE (LSE: SSE) and National Grid (LSE: NG.)? How will they be affected?

Well, over the course of the past 15 years, in the midst of a general equities bear market, the share prices of the utilities have been steadily rising, alongside majors such as BP and Royal Dutch Shell.

Yet the utilities remain hugely profitable

But the interesting thing is, when the oil price turned down in the summer of 2014, the share price of the oil companies fell as well. Yet the utilities were not affected. Does this mean we should keep faith with these firms? How can we explain this divergence?

Well, let’s look at the fundamentals. Take SSE first. This has a forecast 2016 P/E ratio of 13.10 and a dividend yield of 6.12%. Thus the company looks good value, and what is particularly impressive is that stonking dividend yield. What’s more, this is a income which has been consistently high, and indeed increasing, for the past 5 years, and is well covered by profits.

How about National Grid? Well it has a predicted 2016 P/E ratio of 15.90, and a dividend yield of 4.61%. Again, this a firm which has been churning out profits and dividends year in and year out.

I see no sign of either business being over-priced. These are steady, stable companies with predictable profits and dividends. Having said that, I wouldn’t be surprised if, over the long term, share price increases level off and eventually fall, with margins under pressure from falling energy prices and increasing competition.

However, both SSE and National Grid still look good dividend investments. You may be rather late to the party, but both are still worth buying into.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Prabhat Sakya 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

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

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

2 of the best FTSE 100 bargain shares to consider today!

These FTSE-quoted shares are among my favourite UK value shares to consider today. Give me a few minutes to explain…

Read more »

National Grid engineers at a substation
Investing Articles

A stock market crash could be the perfect passive income opportunity. Here’s why

Rather than fear a market crash, Mark Hartley considers how a savvy investor could use the opportunity to build a…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

3 world-class investments to consider for a Stocks & Shares ISA while they’re on sale

Dr James Fox believes the current stock market volatility may provide some investors with the opportunity to supercharge their Stocks…

Read more »