I’m long BP (LSE:BP) and Royal Dutch Shell (LSE:RDSB). That might sound foolish at a time of an historic crash in the price of oil. But I’ll explain why.
Share price falls might make for a nice entry point to top up your Stocks and Shares ISA or SIPP. But short-term price movements matter not one iota. When all about you are losing their heads, that’s the best time to scoop up bargains. Think fearful and greedy.
Both RDSB and BP offer a relatively safe 11% yield. At historically cheap prices below £13 and £3 a share respectively, I think both now offer brilliant value for the long-term investor.
Into your Shell
The actual price of oil did not go below zero on 20 April.
What did happen is that the May futures contract for West Texas Intermediate (WTI), the US benchmark for crude oil, turned negative for the first time in history.
Traders buy and sell futures contracts as speculative bets on the future price direction of the liquid commodity. And the May contract expired on 20 April.
So big oil ETFs that had hoovered nearly a third of all shares were faced with the possibility of those contracts expiring worthless. Futures rules say that anyone still holding at expiry must take delivery of 1,000 barrels of oil per contract. ETFs that just trade prices don’t actually want to receive hundreds of thousands of barrels and have to pay to store them. So in a panic they dumped May contracts onto futures market at any price. Hence the rapid decline.
If you want a better indication of the market price for oil, look at the June futures contract, which is about $20 a barrel. That is a breakeven price for Shell and BP.
The other side
Brent crude, the benchmark used by OPEC countries like Saudi Arabia and Kuwait, is more closely followed this side of the Atlantic. Prices have dropped by 20%, infected to some degree by the WTI futures snafu. But I see this as temporary weakness, brought on by short-term panic and medium-term demand destruction from the coronavirus. Fewer planes in the sky, fewer vehicles on the road, et cetera. When the world returns to normal, oil demand will skyrocket.
Anyway, the price of oil is not supremely significant for the financial health of RDSB or BP. They are billion dollar multinationals. They have their fingers in many, many pies. Shell, for example, just started a $6.4bn natural gas project in Queensland, Australia, in a joint venture project with PetroChina.
And BP has made big investments in the electric vehicle (EV) infrastructure that will dominate our world in the next 10 years. Since 2008, BP’s subsidiary, Chargemaster, has operated Polar, the largest EV charging network in the UK.
Future gains
Both companies make money from every segment of the oil and gas industry. That includes upstream, the actual oil exploration part. There’s also midstream, the transportation of said fuel. And downstream, the products manufactured from raw materials, in plastics, chemicals, packaging, and more.
While a fragile oil industry may see mass bankruptcies, that’s actually good news for BP and Shell. Why? Because of consolidation around these market leaders.
They are the ones with the financial firepower to either scoop up market share at knock-down prices or to muscle in on former rivals’ territory.
I’m bullish, and I’m buying both.
