Is it time to back Big Oil for the long haul?

Should you buy shares in Royal Dutch Shell plc (LON: RDSB) and BP (LON: BP) plc 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.

The price of oil is well down from its peak above $100 per barrel and it’s been down for some time. The share prices of oil majors Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) also languish as reduced cash flow from lower selling prices takes its toll, causing difficulties for the two firms.

Tempting valuations

At first glance, the valuations of these two companies look tempting. City analysts following Shell and BP expect earnings to bounce back during 2017 in both cases. With  Shell’s shares at 1,886p and BP’s at 416p, investors can look forward to dividend payouts yielding over 7%, which should be covered around once by those resurgent earnings next year.

One theory is that with the price of oil so low the most likely direction for further price movements is up rather than further down. Any recovery in the price of oil that does materialise will help boost the cash take at Shell and BP and the shares will no doubt respond by rising as well.

Should you invest £1,000 in Aj Bell 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 Aj Bell made the list?

See the 6 stocks

As part of a diversified portfolio of shares, maybe now is a good time to lock in the big yields on offer with the oil majors. What could possibly go wrong?

Declining oil demand?

Perhaps one of the biggest uncertainties is the evolving market for oil and oil-based products. There’s potential for a long-term fall in demand for oil as other energy sources disrupt the market. Just as technologies such as solar power, battery storage, wind generation and high-insulation building methods appear to be edging towards critical mass, oil-extraction technologies appear to have driven a glut in oil supply.

Such supply and demand dynamics will always work in a shorter-term cyclical way to keep the price of oil bouncing up and down, but maybe we’re witnessing the start of a longer trend away from the use of oil. If that proves to be the case, the price of oil could drop further. 

Back in July, BP said it continues to reduce costs and expects 2016 capital expenditures to come in below the firm’s previous target of $17bn. Investments could drop to as low as $15bn in 2017 if crude prices remain weak, the firm says. Chief executive Bob Dudley reckons the company has no plans to increase capex for the rest of the decade.

Capital preservation

Such an approach suggests BP is focused on capital preservation and cost-cutting, which demonstrates how much the fallen price of oil has affected oil firms, crimping their ability to invest in some cases. In many industries, a downturn leads to depressed asset prices and can provide a good opportunity for firms to expand by buying up other companies and investing in assets when they’re cheaper.

However,  supplying oil is a commodity business without price differentiation between producers or the opportunity to add much value to the raw product. As such, the sector is vulnerable to economic cycles. On top of that, Shell and BP are exposed to potential operational shocks, such as BP’s Gulf-of-Mexico oil blowout disaster. Extracting oil can be a dangerous and expensive business.

Should you invest £1,000 in Aj Bell 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 Aj Bell made the list?

See the 6 stocks

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.

Kevin Godbold has no position in any shares mentioned. 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

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »