With escalating tensions in the Middle East, the focus returns to the share prices of BP and Shell. Harvey Jones examines the associated risks and possible gains.
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Market Response to Tensions
The share prices of BP and Shell are climbing significantly today – could we be witnessing another substantial surge?
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The Shell (LSE: SHEL) stock price surged by 5% during early trading today, mirroring a similar rise in BP (LSE: BP). For those curious about the reason, a glance at the news reveals the cause: the recent escalation of tensions in the Middle East.
BP and Shell Performance
The FTSE 100’s reliance on oil and defense companies is proving beneficial today. I can relate this to my SIPP, where I own shares in BP and defense contractor BAE Systems, which are cushioning the losses in other areas of my investments. Could this signal a resurgence for BP and Shell?
This recent increase has alleviated any remaining uncertainties regarding my choice to invest in BP back in September 2024. I entered the market when oil shares were out of favor and crude prices were nearing $60 per barrel. Given the cyclical nature of the industry, I made my purchase during a period of low sentiment when valuations appeared attractive.
I was concerned that Big Oil might fall out of favor as the global economy faced challenges and the shift towards greener energy accelerated (with BP on the sidelines). However, I also believed that the notion of oil and gas becoming stranded assets was improbable. As we observe today, they remain vital to the global economy. The apprehension that Iran and its allies could strike tankers in the Strait of Hormuz, through which a fifth of the world’s oil supply flows, is sufficient to unsettle markets.
Investment Risks and Rewards
The FTSE 100’s beacon of hope
It’s important to remember how the shares of BP and Shell surged in 2022, as Europe rushed to find alternative energy sources following Russia’s invasion of Ukraine. Much of the sector’s recent lackluster performance can be attributed to the reversal of that energy crisis.
Over the past five years, BP’s stock has risen significantly by 65%, while Shell has experienced a remarkable increase of 112%, including dividends. In contrast, the gains over the last year are more subdued at 10% and 15%, even after this morning’s rise.
Analyst Insights on Oil Stocks
Neither firm is solely focused on oil prices. They engage in trading, refining, and various activities beyond extracting crude oil. Nevertheless, their short-term trajectory will be influenced by geopolitical factors, and the associated risks have recently escalated. Anticipations of a significant surge in oil stocks might be exaggerated. Recently, investors seem to have largely overlooked discussions of war.
Prospects for dividends and growth
At The Motley Fool, we advocate for investors to adopt a long-term perspective when purchasing shares, rather than attempting to capitalize on short-term market fluctuations. With that in mind, I still believe both options are worthy of consideration. BP is currently trading at a reasonable forward price-to-earnings ratio of approximately 13.5, while Shell is even more affordable at around 11.5.
My primary motivation for selecting BP instead of Shell was the income potential. BP’s trailing yield is approximately 5%, surpassing Shell’s 3.3%. Additionally, I believed BP had a stronger chance for recovery, considering the corporate turmoil it faced. The new CEO, Meg O’Neill, has a significant task ahead of her to rectify the situation.
In early February, both firms released their reports, and the news was not encouraging. BP halted its share buybacks to bolster its financial position as oil prices declined. Meanwhile, Shell fell short of profit expectations but still produced robust cash flow. It revealed a new $3.5 billion buyback plan and increased its dividend by 4%.
These businesses continue to be risky and controversial, operating in an unpredictable environment, and I can see why some investors might hesitate to engage with them. However, from an investment perspective, I still believe that BP and Shell are worth considering today, regardless of what unfolds globally.