Like just about every sector in the world, oil stocks plummeted as a result of this year’s market crash. Since then, the share price of two of the FTSE 100’s biggest companies has followed a similar path.
Both Royal Dutch Shell (LON:RDSa) (LSE: RDSB) and BP (LSE: LON:BP) took a hit in mid-March, before a rise at the end of the month. Aside from a shared spike on June 8th, the competing oil stocks have been on a relatively consistent downturn since then.
But is this an opportunity to buy cheap, or the start of something worrying?
Which Oil Stock To Buy? On one hand, BP is making a lot of progress. Oil stocks could be hit massively by changing attitudes to climate change, so the company’s commitment to increasing low-carbon investments by 1,000% in the next 10 years and becoming carbon-neutral by 2050 are promising for the long term.
On top of this, it plans to cut costs by $2.5bn by the end of 2021, with a halving of its dividend and the reduction of 10,000 jobs already having contributed to this. Its debt is also down by an impressive $10bn since Q1.
Having said this, BP’s second-quarter earnings were, like most oil stocks, poor. In comparison to a $2.8bn profit during the same period a year earlier, the company reported a loss of $6.7bn. This is reflected in a share price reduction of 26% since the publication of its Q2 results, and a 56% reduction in the last 12 months.
BP’s third-quarter trading update is just around the corner, so we’ll soon get an insight into the implications of a turbulent summer.
Cash Flow Positive Like BP, Royal Dutch Shell had a rough second-quarter, so its reported earnings paint a grim picture. A loss of more than $18bn and a $3bn debt increase between Q1 and Q2 2020 certainly didn’t help its share price. As a result, it has dropped by around 10% since the results were released, while it is down 56% over the last year, just like BP.
Understandably, Paul Summers views Shell as a risk, but I’m a little more positive about the future of oil stocks and this FTSE 100 giant.
The company is doing well to reduce costs, including reducing its OPEX (operating expenditures: the day-to-day running of the company) by $1.1bn in comparison to Q1, and reducing its CAPEX (capital expenditures: long-term developments) by $1.4bn in the same period.
This has helped contribute to a positive cash flow of $243m, with CEO Ben van Deurden providing the confident suggestion that its “high-quality integrated portfolio, disciplined execution and forward-looking strategy enable sustained competitive free cash flow generation.”
The performance of oil stocks is always tough to predict, but Shell seems to be moving in the right direction. Its Q3 results will also be released at the end of October.
On The Whole Despite the current decline in their share prices, both of these oil stocks seem like promising investments that are in good enough health to weather a potential second lockdown and recover well.
However, with its commitment to green energy and a slightly steeper recent fall in share price, I think an investment in BP at this low price has the potential to provide better returns with more long-term safety than Shell.
The post Is now the time to buy these FTSE 100 oil stocks? appeared first on The Motley Fool UK.
Motley Fool UK 2020