As the coronavirus went global in early 2020, the world economy collapsed. Due to social restrictions and lockdowns, energy usage slumped and the oil price crashed. On 1 January 2020, a barrel of Brent Crude oil cost around $66. During the Covid-19 crisis, this collapsed below $16 in April 2020. Crikey. But oil came gushing back in 2021-22, with oil shares following suit. So should I buy BP (LSE: BP) shares or Shell (LSE: SHEL) stock now?
Gushing oil drives BP shares and Shell stock higher
At its 52-week low on 22 January 2021, Brent Crude hit $54.48. On 1 December 2021, it traded at $68.87, but then gushed even higher. As I write, Brent Crude is $91.07 a barrel. That’s a surge of almost a third (+32.2%) in two months. Also, it’s over two-thirds (+67.2%) higher than 2021’s low. As a result, BP and Shell stock have soared.
At their 52-week low, BP shares hit 250.35p on 2 February 2021. As I write, they trade at 387.55p. That’s a gain of 137.2p (+35.4%) in 12 months. Meanwhile, Shell stock hit a 52-week low of 1,289.4p on 3 February 2021. Today, it is 1,895.2p, up 605.8p and a return of nearly half (+47%) in one year. Like BP shares, Shell stock has been buoyed by rising oil prices. But what if oil keeps climbing?
BP versus Shell: which would I buy?
For environmental, social and governance (ESG) investors, investing in fossil-fuel companies is problematic. But oil and gas will remain crucial to the global energy supply for several decades. Also, supply issues mean that oil might go even higher, despite being at seven-year highs. Brent Crude last exceeded $100 a barrel in October 2014. It also exploded to a record peak above $147 in July 2008. And when the oil price climbs, it boosts oil producers’ cash flow, profits, and earnings. Thus, while high oil prices fuel inflation (the rising cost of living), they also boost the prices of BP and Shell shares.
I don’t own BP or Shell shares today, but I may add BP and/or Shell to my family portfolio. They could act as a hedge against higher UK energy prices, which are already rocketing. Here’s a comparison of the two stocks:
| BP | Shell | |
| Share price | 386.6p | 1895.2p |
| Market value | £75.93bn | £147.1bn |
| P/E ratio | 16.1 | 43.3 |
| Earnings yield | 6.2% | 2.3% |
| Dividend yield | 4.0% | 3.1% |
First off, Shell is almost twice as large as BP. However, its shares trade on a higher price-to-earnings ratio and lower earnings yield. Also, BP’s cash dividend yield is 0.9 percentage points higher than Shell’s. Meanwhile, the FTSE 100 index also offers a dividend yield of 4% a year. On fundamentals at least, BP shares look cheaper than Shell’s. However, Shell made some major write-downs in 2021, which will temporarily affect its fundamentals. Also, these are backward-looking figures, so both companies’ fundamentals should improve in coming quarters.
Furthermore, if the oil price hits $100+ and stays elevated, then BP and Shell should make out like bandits. In time, this might trigger larger share buybacks and higher cash dividends for shareholders. On the other hand, if a new virulent virus variant emerges, then all bets would be off. Indeed, it’s possible that the oil price could collapse again, dragging down both BP and Shell.
Nevertheless, I like the look of both, so I’d be a buyer of both today. However, I would favour BP over Shell on value. And I expect both companies will have a better 2022 than 2020-21!
