FTSE 100 giant Royal Dutch Shell‘s (LSE: RDSB) share price has been on the rise. It has increased by over 5% at the time of writing this article from the levels seen at the beginning of June. Further, even though there have been a few gyrations over the months, the share price has come a long way from the lowest levels seen in 2019 at the end of January. Needless to say, these are heartening developments for investors.
Going forward, I will be watching the oil sector closely following tensions between the US and Iran and one key question comes to my mind: what is the potential impact on the share price of an oil company like Shell (LON:RDSa) or its peer BP (LSE: LON:BP)?
Oil price outlook There’s no denying that higher oil prices are good for oil companies, but the potential economic damage from standoffs between countries can erode demand over the longer term, which in turn can negate the gains from price increases. I think both these arguments are worth considering, since we at the Motley Fool are interested in long-term investment opportunities.
There’s no way of knowing how the geo-politics will play out, but I am yet to see any dependable forecasts predicting sharp increases in crude oil prices. In fact, if the situation remains contained, it could be exactly the opposite. The International Energy Agency’s update in mid-June said that supply is enough to “limit significant upward pressure on oil prices” going into 2020.
Shell looks ahead with confidence With this as the background, I’d consider Shell’s merits as a company independent of the wider environment it operates in to make an investing decision. In other words, the latest oil price increases are a distraction from the actual investing story rather than a determining factor. From the last time I wrote about it, fully convinced that this is indeed a share worth holding in the long-term, little has changed. In fact, the price has risen by around 20% since. The company also sounds confident about the future, as revealed in its latest strategy update and financial outlook for 2025.
Despite this, its price-to-earnings ratio (12 months trailing) is at an affordable 11.6x compared to peer BP, which is trading at 14.3x. Interestingly enough, this is despite the fact that BP has seen a lower share price rise in recent months. While the price charts for both companies reveal that they tend to move together, Shell has been the one that has attracted most investor interest.
BP has its merits This doesn’t of course mean that BP isn’t a buy as the company has a lot going for it too. I am inclined towards shares that offer a good return on capital but dividends are an important consideration for investors and BP ticks those boxes. As my Foolish colleague Rupert Hargreaves pointed out recently, its dividend per share has risen impressively over the years and its strong track record is expected to continue. The share has also given good returns on capital, and I believe there is little in the company’s performance to suggest that it will be derailed.
On balance, though I’d rather buy Shell. The bargain-hunter in me is attracted to the fact that it is still the cheaper of the two but its strong current momentum also appeals.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019