2016 was without doubt a comeback year for our London-listed oil majors. With the price of crude recovering from the depths of around $30 a barrel at the start of the year, and finishing on a high of $57 a barrel, UK oil giants such as BP (LSE: BP) ended the year in much better shape than they started.
Crude recovery
BP’s shares responded well to the rise in the cost of oil since the start of 2016, with the share price soaring 44% to 510p during the calendar year. The price of crude has since settled around $55 a barrel and yet intriguingly BP’s shares have pulled back sharply to 454p. So, is this to be our last chance to buy BP for under 500p before the shares resume their upward surge?
Well, last month’s results certainly looked promising, with the company making great progress after a difficult few years. Full-year reported profits came in at $115m, a big improvement compared to the massive $6.5bn loss it suffered in 2015. The figures were even more impressive when legacy charges relating to the Gulf of Mexico disaster were removed, with profits much healthier at $4.1bn.
Hard to resist
Investors should also be pleased with the company’s continued tight discipline on costs, with controllable cash costs reduced by $7bn since 2014, and delivered a full year ahead of schedule. BP has also made significant strides in creating a stronger platform for future growth, with six major project start-ups launched during 2016, and investment decisions made on a further five major projects.
It would be foolish to speculate on the future of the oil price, but BP has undoubtedly made great strides in strengthening its financial position and laying the foundations for a return to growth. In the meantime, the surge in the oil price over the past few months has meant that BP’s previously shaky dividend is on much firmer ground. I believe an increasing number of investors will find the 7.3% prospective dividend yield difficult to resist, thereby sending the share price back up and beyond 500p.
Enviable record
Also benefitting from higher oil prices is BP’s arch-rival Royal Dutch Shell (LSE: RDSB). The Anglo-Dutch multinational has also suffered in recent times, with its shares plunging from highs of 2,592p in 2014 to the depths of 1,278p by early 2016. Shell’s dividend has also been on shaky ground in recent years, with the company’s earnings alone unable to cover the generous shareholder payouts.
But much to its credit, the company has managed to maintain its enviable record of not cutting its dividend since the end of World War II, and now looks increasingly likely to hold onto that accolade. Like its great rival, Shell finished 2016 in much better shape that it started, with cost synergies achieved from the acquisition of BG Group helping to reduce operating expenses, and investors perhaps less worried about the sustainability of the all-important dividend, which now yields 6.8%.