Which oil major will be the first to soar by 30%+?

Which of these three oil stocks should you buy right now?

| 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.

While the oil price has risen from a low of under $30 per barrel to above $50 per barrel in 2016, there’s no guarantee that this trend will continue. Investors should therefore seek out oil stocks with wide margins of safety in order to minimise downside risk.

Of course, a wide margin of safety provides greater potential rewards should the price of oil move higher. And by focusing on this, investors can deduce whether Shell (LSE: RDSB), BP (LSE: BP) or Tullow Oil (LSE: TLW) has the best prospects to rise by 30%-plus.

Tullow Oil

It’s an exciting time for Tullow Oil. Its production is in the process of being ramped up due to its offshore Ghana TEN assets coming onstream. This is set to shift the investment profile of Tullow Oil somewhat, with it signifying a change from a predominantly exploration company to one focused on production to a greater extent.

The result of this is due to be significantly improved profitability and cash flow. For example, Tullow Oil is forecast to increase its bottom line by 142% in the 2017 financial year. This puts it on a price-to-earnings growth (PEG) ratio of 0.1, which indicates that it has a wide margin of safety. This could stimulate investor sentiment in the stock and push it higher by considerably more than 30%, while also improving Tullow Oil’s long-term sustainability by making its sizeable debt repayments more affordable. 

BP

BP offers a somewhat different appeal to Tullow Oil. It’s not expected to ramp up production to the same extent as its sector peer, but it’s in a transitional period. BP is now moving away from the Deepwater Horizon oil spill of six years ago and its financial performance should benefit due to the reduced compensation payouts likely to be required in future years. This should aid the company’s dividend, with BP already yielding a hugely enticing 6.9% at the present time.

BP’s dividend is due to be fully covered by profit next year. This indicates that while dividends may not increase rapidly, they’re likely to be affordable over the medium-to-long term. And even if BP rises by 30%, its shares would still yield 5.3%. This provides evidence of their upside potential and wide margin of safety since a yield of 5.3% would be around 180 basis points higher than the FTSE 100’s yield.

Shell

While Tullow Oil and BP have wide margins of safety and the potential to rise by over 30%, Shell offers the best risk/reward opportunity of the three stocks. That’s because its bottom line is expected to benefit over the coming years from the integration of the BG asset base, with Shell recently increasing the amount of anticipated synergies from the combination. This could positively catalyse investor sentiment in Shell and push its shares upwards by over 30%, while its dividend yield of 7% beats BP’s and provides evidence of Shell’s exceptionally wide margin of safety.

Unlike BP, Shell isn’t recovering from a major oil spill and its balance sheet and diversity is more appealing than for Tullow Oil. Shell’s dividend is due to be fully covered by profit next year and because of its lower risk and high potential rewards, it’s the pick of the three oil majors and the one which is likely to deliver a 30%-plus return first.

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.

Peter Stephens owns shares of BP and Royal Dutch Shell. The Motley Fool UK has recommended BP and Royal Dutch Shell B. 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

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »