Which is the better buy? BP vs Shell

Profits. Dividends. Debt. Growth. Which of BP plc (LON: BP) and Royal Dutch Shell plc (LON: RDSB) comes out ahead in this fight?

| 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 past two years haven’t been kind to the oil industry as plummeting crude prices have devastated profits and shone a light on the sky-high debt many producers carry. But investors shouldn’t forget that the oil industry is a cyclical one and the best time to buy shares is when they’re out of favour. So, are hardy contrarian investors looking for exposure to the industry better off buying BP (LSE: BP) or Shell (LSE: RDSB)? To answer this question, we’ll grade both companies on profitability, dividends, debt and long term potential.

Profitability through first nine months of 2016

 

Should you invest £1,000 in NatWest Group 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 NatWest Group made the list?

See the 6 stocks

Revenue

Pre-tax profits

Net cash from operations

BP                 

$134,485

($2,912)

$8,263

Shell

$168,824

$2,178

$11,445

If we just look at the pre-tax profits, Shell is the runaway winner compared to BP. But this is skewed by Gulf of Mexico-related charges, including $6.3bn in costs and $2.8bn in tax credits during the period. If we look at the cash each company’s operations bring in compared to revenue, they’re broadly similar.

And when it comes to surviving low oil prices, both majors are in roughly the same boat. BP is targeting balancing capex, opex and dividends at $50-$55/bbl and Shell’s targets won’t be far off this mark. So once Gulf of Mexico related payments begin winding down in the next two years, BP and Shell are likely to have similar levels of profitability. That means there’s no clear winner when judged by this metric. So on to the next one.

 

Cumulative dividends paid in 2016

Dividend yield

BP

$3,429

7.21%

Shell

$11,177

7.31%

Once again, BP and Shell largely fail to differentiate themselves when judged by the income shareholders are receiving this year. As far as the sustainability of these 7%-plus yields go, neither company is in very good shape. That’s obvious if we compare the profits each has made in 2016 with how much they’ve paid out in dividends. With similar yields and similarly uncovered dividends, we can’t give either company a clear victory on this metric either.

 

Net Debt

Gearing

BP

$32,400

25.9%

Shell

$77,845

29.2%

In this regard BP is in much better shape than Shell. The reason for Shell’s high debt, aside from normal operating debt and paying for uncovered dividends, is the $53bn acquisition of competitor BG group earlier this year. Paid for with a combination of debt-financed cash and stock, this was the main driver for Shell’s gearing rising from 12.7% in September 2015 to the current 29.2% year-on-year. With net debt rapidly approaching the high end of the 20%-30% range management is targeting, Shell loses to BP on this topic.

Long term view

However, while Shell’s debt is worrying in the short term, the reason it rose so dramatically, that BG acquisition, also makes it a more appealing option than BP in the long term. That’s because the addition of BG makes Shell the world’s largest commercial supplier of liquefied natural gas (LNG). As developed economies turns away from dirty burning fossil fuels such as oil and coal, LNG is becoming more popular as a cleaner burning alternative. Although LNG prices have also suffered in the last two years, the long-term outlook for this easily transportable yet fairly clean fossil fuel are much brighter than oil. For that reason, I’d be picking Shell if I had to own one oil major for the next few decades.

Do you really want to own cyclical stocks for decades?

Should you invest £1,000 in NatWest Group 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 NatWest Group 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.

Ian Pierce 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

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 »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »