Why BP Plc And Royal Dutch Shell Plc Lead The Oil Business

Published in Investing on 3 July 2013

BP plc (LON: BP) and Royal Dutch Shell plc (LON: RDSB) triumph in the Oil & Gas sector battle.

BP

In my last sector examination, Aviva was my pick of the FTSE 100's insurance companies, though it was a tough choice in an attractive-looking sector. Today it's time to take a look at our oil & gas producers, some of which fill me with optimism.

It's a less-populated sector this time, so we have just four big companies to look at, BG Group (LSE: BG), BP (LSE: BP), Royal Dutch Shell (LSE: RDSB) and Tullow Oil (LSE: TLW). To give us a nice round number and provide some comparison, I've also added Premier Oil (LSE: PMO), the second-largest oilie in the FTSE 250 and one with diversified geographical interests -- I didn't want to choose one focused on a single country or region.

Here's a quick look at some fundamentals:

CompanyBGBPPremierShellTullow
Market cap £38bn £86bn £1.8bn £136bn £9.1bn
Recent price 1,125p 456p 339p 2,184p 1,033p
Share price growth -16% 5% -7% 6% -32%
Historic EPS growth 3% -55% 31% -6% -5%
Forward EPS growth -4% 36% 43% -4% 0%
Historic P/E 11.8 10.6 10.6 7.6 27.8
Forward P/E 13.8 8.4 7.5 8.0 22.8
Historic Dividend 1.7% 5.3% 1.6% 5.2% 1.0%
Forward Dividend 1.6% 5.2% 1.1% 5.3% 1.3%
Forward Cover 4.5x 2.3x 13x 2.4x 3.8x

Share price growth is over the past 12 months, historic figures are for the last reported full year, forward figures are for the next forecasts.

First impressions

My first thought looking at these quick figures is that there are some screaming bargains in this sector, with global crises, weakening Chinese growth and other short-term panics depressing the market -- and all at a time when oil is back over $100 a barrel, too!

But which is my favourite? Well, if you're looking for smaller exploration-focused oil companies with strong growth characteristics, you might do well to examine Premier Oil more closely. With good EPS forecasts and a very low P/E, the firm is on a forward PEG (P/E divided by EPS growth) of only 0.2, rising to just 0.6 for 2014 forecasts -- growth investors often look for 0.7 or less.

I'm not a growth investor these days, so I'm not going for Premier Oil here -- but what's left of a younger me does like the look of it.

Two more out

I'm going to drop Tullow Oil, too. The company has done magnificently well, growing its share price by around 5,000% since 1990. But it looks like the shares have been trading on past glories for some time now, and the price has fallen back more than 30% over the past year -- and to me it still looks pricey compared to the others.

BG Group is also out for me, because there's nothing there strikes me as especially attractive or out of the ordinary. The P/E is not extreme but not cheap, and dividends are low -- and I do think the big oil & gas companies should be providing owners with decent income.

The big two

That brings me to BP and Royal Dutch Shell -- I already have BP in the Fool's Beginners' Portfolio. And you know what? I just can't choose between them. They both offer well-covered dividends of better than 5%. And earnings growth? Well, BP's comes after a down year, and in the longer term I'd expect both to average similar rates of growth.

BP's Gulf of Mexico catastrophe is almost entirely in the past now, and doesn't give me any cause for fear -- but at the same time, there's little disaster-discount to be had these days, either.

So it's a dead heat this time, because both BP and Shell just look way too cheap to me -- I expect both to reward shareholders handsomely over the next 10-20 years.

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> Alan does not own any shares mentioned in this article.

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Comments

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richjfool 03 Jul 2013 , 4:08pm

"BP's Gulf of Mexico catastrophe is almost entirely in the past now, and doesn't give me any cause for fear -- but at the same time, there's little disaster-discount to be had these days, either."

The financial implications of the GOM catastrophe. are far from over. Whilst BP put aside $7.8bn (£5.2bn) when it agreed to pay compensation in 2012, the company has become increasingly concerned that the final figure would be much higher and that the system is being abused, to the extent that an ex-FBI Chief has been appointed to probe the payments. There are also still fines to be paid. So the final cost is still very much an unknown quantity.

I'm sticking with Shell, thanks.

LazyLycosa 04 Jul 2013 , 8:11am

"BP's Gulf of Mexico catastrophe is almost entirely in the past now, and doesn't give me any cause for fear -- but at the same time, there's little disaster-discount to be had these days, either"

The final costs are great source of uncertainty and could severely damage BP. If Judge Berbier awards maximum penalties, BP could be looking at around $18bn in fines. Combined with the open-wallet approach the same Berbier has said the company should use when paying out compensation, the omens are not good. If Berbier does awar maximum penalties, the BP could appeal and the process will drag on for another couple of years. Never trust the law, especially in a foreign country.

SheungWan 04 Jul 2013 , 9:17am

The price-fixing allegations seem to be sitting like a lurking cloud around Shell plus the feeling of turning into a beached whale. Unfair?

seconddecade 04 Jul 2013 , 10:42am

I think the price fixing uncertainty is unlikely to impact much. Every time we see a large corporation caught with its hands in the till/other people pockets etc what happens is they get a relatively small fine.. a new procedure is set up to do whatever was wrong and the profits keep comming.

If the worst happens and the price of oil is forced down.. then all that will happen is consumption will go up again until the current price is reached again. I think the oilies profits are safe for the next decade.. after that I hope they begin to buy some good renewable tech (it's on their radar already)

Joyful9 04 Jul 2013 , 10:43am

I agree with the above comments about BP. And you can add the disastrous results of the break-up of TNK-BP. Long term the oil majors have been a wonderful investment and Shell is the obvious choice. For more details see my blog at http://thejoyfulinvestor.blogspot.co.uk/2013_02_03_archive.html

SimpleEconomics 04 Jul 2013 , 11:41am

I like BP and Shell but longer term I would think BG is a far better bet. BG has licences in Brazil which when developed will massively change the amount of gas they are producing on a daily and yearly basis.

True some of this is priced in to the stock hence the current P/E but I see far more scope for future growth than in the big two.

Yes BG has had its issues recently in delivering on these big projects but the question as an investor you have to ask is will the company be able to deliver on these projects?

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