UK Stocks

Is now a good time to invest in BP and Shell?

Fears that much of BP’s and Shell’s oil reserves will become stranded assets are holding back BP and Shell shares, but is the prognosis for oil much stronger than markets realise?

BP (LON: BP) and Shell (LON: SHELL)  profits soared in 2021. BP profits hit £9.5 billion in 2021, compared to a market cap of £77 billion.  Shell profits for the same period were $19.3 billion or around £14 billion, compared to a market cap of £149 billion. The dividend yield at BP is currently around four per cent and around 3.3 per cent at Shell.

In both cases, shares have risen sharply over the last six months or so but remain significantly down on their value pre-Covid. Yet for BP, profits in 2021 were significantly greater than profits in the years before Covid. Shell profits in 2021 exceeded 2019 profits. So why aren’t shares higher?

The answer is simple. Analysts fear that oil reserves at BP and Shell could become stranded assets. Both companies target net-zero by 2050, leaving a big question mark hanging over future profits from oil.

Neither company will cease to be oil producers altogether in 2050; instead, the plan is to offset the C02 emissions linked to oil activities with carbon capture.

Even so, both companies are banging the renewables, and indeed hydrogen, drums hard. But, alas, fears over the prospect of oil in the long term dangle like a sword of Damocles above both companies and their share prices.

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Are fears concerning oil price justified?

I have long been an oil bear. I thought that the oil cycle had one more upwards rotation in it, and then the oil price would crash, and global oil reserves, currently thought to be worth $150 trillion, would lose a significant proportion of that value. They could even become stranded assets.

I think the markets broadly agreed with this view.

But the markets are not always right, and as investors, we must always be willing to change our minds.

Anas Alhajji is a world-renowned oil expert, his view is quite different, and if he is right, then BP and Shell shares are exceptional investment opportunities for both income and growth investors.

He believes that forecasts for oil supply don’t match forecasts for demand — in other words, planned oil demand is likely to exceed planned supply for the foreseeable future — putting upwards pressure on the oil price. 

Added to that, he says that oil price forecasts ignore the rebound effect from transport fuel efficiency — as cars become more fuel-efficient, we drive more.

He also argues that green policies won’t affect oil as much as generally assumed. For example, while the migration to electric vehicles (EVs)is likely to be rapid across the developed world, demand for traditional cars is likely to be extremely rapid in developing nations.

On top of that, he believes that the rush towards EVs will push upwards on the mineral costs used in batteries and that solar panels and blades for wind turbines will be made from materials fashioned from oil, such as plastic.

He also argues that there are geopolitical reasons to expect the exodus from oil to be much slower than anticipated. For example, EVs require minerals often mined or refined in regions that the US deems a security risk, such as China.

You may or may not agree with Anas Alhajji, but even if he is partly right, the oil price is likely to be much higher longer term than is generally assumed. And while BP and Shell want to reduce reliance on oil, they remain at heart oil companies. So the markets may be underestimating the future importance of oil.

Not Investment Advice Indie Investor is for general information use only. It must not be relied upon by readers when making (or not making) their investment decisions. If in doubt you should seek advice from a professional financial adviser.

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