The price of oil slid to its lowest in five years on 1 December, with Brent crude briefly dipping to $67.53 per barrel — it was up near $115 in June. That’s been hurting the prices of oil stocks — Royal Dutch Shell (LSE: RDSB) shares have fallen 13% since the beginning of July, and BP (LSE: BP) (NYSE: BP.US) is down 20% since its recent high on 26 June.
In the long term oil will surely recover, so is it a good time now to buy Shell or BP? And if so, which one?
Similar valuations
Fundamentally, the valuations of the pair are not miles apart. Shell is expected to see earnings per share (EPS) climb by 33% this year after a 39% fall last year, with a 5% fall penciled in for 2015. Forecasts for BP suggest a 46% fall this year after more than doubling last year, with a small 2% recovery next year.
Forward P/E ratios are similar, with Shell on 9.7 to 10.3 and BP on 9.6 to 9.5. There’s a better dividend forecast for BP, yielding 5.8% to Shell’s 5.3%, but Shell’s cover of 1.92 times edges ahead of BP’s at 1.75 times. But I reckon this similarity in the two companies’ valuations is misplaced, and Shell deserves a higher rating.
At third-quarter time Shell reported a 16% rise in nine-month current cost of supplies earnings to $19,300m, while the quarter itself brought in a 31% rise to $5,847m. At BP we heard of a 59% fall in replacement cost profit to $9,402m (although the underlying fall was said to be only 6.8%). Due to the volatility in the profits of these two companies year-on-year, that alone is not enough to give Shell as big a lead as I think it should have.
The elephant
What does it for me is that old Gulf of Mexico disaster. Every year since what was billed as the largest accidental marine oil spill in the history of the petroleum industry, many of us have thought we’ve had a fair idea of the final bill and that there were no more surprises coming. And every year we’ve been wrong.
The most recent blow was the upholding last month of the earlier “gross negligence” ruling, which should vastly raise the per-barrel penalties and could, according to some commentators, add as much as $15 billion to the total bill.
Too expensive for the risk
And there’s the rub — for me BP shares are just not trading at a sufficient discount to compensate for the ongoing risks associated with the oil spill case, and it’s surely going to drag on for years.
Over the past 12 months Shell shares have beaten BP with a 4% rise against a 12% loss, and I expect that trend to continue at least through 2015.