BP (LSE: BP) (NYSE: BP.US) and Shell (LSE: RDSB) (NYSE: RDS-B.US) have experienced a strong first half of 2014, with shares in two of the world’s biggest oil companies climbing by 6% and 11% respectively. When compared to the FTSE 100 (which is up 1% over the same time period), this shows that even though market sentiment surrounding the two oil majors has been weak in recent years, they can still provide investors with capital gains as well as a strong yield.
Of course, a key reason for their impressive share price performance has been a higher oil price, with unrest in Iraq being a key contributor for its continued higher highs. However, does this mean that investors should buy shares in BP and Shell, or could further unrest in Iraq harm their prospects in that country?
A Presence In Iraq
Both BP and Shell have a presence in Iraq. BP signed a technical service contract with Iraq’s state-owned South Oil company in 2009, with the aim being to boost production from the vast Rumaila oil field in the south of the country. Indeed, it is hoped that the Rumaila oil field will account for 3% of total world oil production by 2016. This shows not only how big the oil field is, but also potentially how lucrative it could prove to be for BP.
In addition, Shell also has a subsidiary based in Iraq. It is the lead operator on a 20 year contract to provide technical assistance in the development of the Majnoon oil field, which is one of the biggest oil fields in the world. As with BP, there appears to be long-term potential for Shell in Iraq.
Diverse Operations
Of course, both Shell and BP have a vast amount of diversity; both companies operate across the globe and a key consideration for them is minimising their exposure to one particular region or area for fear of supply disruptions. Therefore, while Iraq presents a potentially lucrative opportunity for both companies in the long run, they appear to be sufficiently diversified to absorb potential disruption from further unrest.
A Higher Oil Price
As mentioned, a knock-on effect of unrest in Iraq is a higher oil price, as concerns abound regarding supply disruptions. Clearly, a higher oil price is positive news for Shell and BP as is does not affect costs, but does increase revenue. So, while unrest in Iraq harms the long-term potential of both companies, it appears to be more than offset by a higher oil price — which is why shares have continued to show strength in recent weeks.