If 2014 is remembered for anything, economically, it will be the oil price crash. In July, Brent Crude traded at $115, and that seemed perfectly rational. Today, it has plunged to $64.
The share prices of BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) have duly crashed as well.
As global, vertically-integrated businesses, the UK-listed oil giants aren’t a pure play on the oil price, but they can’t escape unscathed in times like these.
BP is down more than 20% over the last six months, and Shell is down more than 15%. Neither will have made you rich in 2014 (unless you’ve been shorting them like crazy). But could they turn a corner next year?
How Low Can You Go?
I like a contrarian buy as much as the next man, but with Bank of America predicting oil will fall to $50, the recovery could take time.
Especially since a strange thing seems to be happening right now. As the oil supply rises, demand is falling (even in the gas guzzling US). That isn’t supposed to happen.
Electric cars, renewables, ethanol, fuel efficiency and changing social habits, which has seen young urban people lose their car fetish, could continue to tarnish black gold.
Slowing China won’t help.
The New Oil Age
BP and Shell have seen the future coming. Both have been cutting back on production and exploration spend, and tightening their sprawling operations.
Improved refining margins and tightening performance management helped Shell to a 31% profit hike in the third quarter, while rising earnings from natural gas have offset the oil slide.
BP is also tightening, as it copes with the lingering Gulf of Mexico aftermath and the collapse in the ruble following US and European sanctions against Russia.
Divesting assets, slashing capital costs and doubling profits at its downstream business have helped it carry on motoring in the age of cheap oil.
Slick Investment
Nobody saw the oil slide coming, and nobody really knows if it will rebound. Right now, sentiment is against it.
Trading at five times earnings, BP looks worth a punt. But then, I’ve been similar things for the past three or four years. Shell is more expensive at 12 times earnings but looks a more solid prospect, given its growing natural gas operation.
As the commodity super cycle grinds to a halt, energy is now an uncertain and volatile sector. But with BP yielding nearly 5.7% and Shell yielding nearly 5.3%, the riches could still flow.