Profits soar

Let’s start by looking at just how good business has been.

Thanks to soaring oil and gas prices, profit came in at $4.1bn for the final three months of last year. This compares favourably to the $3.3bn in Q3. All told, BP made a $12.8bn profit in 2021 — the company’s highest number for no less than eight years.

Bumper cash flow has also allowed BP to strengthen its balance sheet. Net debt stood at $30.6bn at the end of 2021. That’s a reduction of $8.3bn from 2020. 

CEO Bernard Looney said the results show that the company is “performing while transforming” into an integrated energy company with more focus on offshore wind and hydrogen projects. I can’t see any reason to argue against that based on today’s figures.

Dividend delight

One of the main attractions of the shares over the years has been its dividend stream. Today, it said it would be returning 5.46 cents per share for the last quarter.

Analysts are predicting that the total payout will rise very slightly in 2022 to 22.4 cents (or 17p) per share. That gives a yield of 4.1% at the current BP share price. For perspective, that’s substantially more than the 0.61% in interest I’d get from the best Cash ISA.

For its part, BP is forecasting being able to raise the annual cash return by “around 4% through 2025“. Having been buying back its own stock by the bucketload over recent quarters, it also plans to purchase another $1.5bn worth of shares from surplus cash flow over Q1. 

Getting political 

If today’s report made for pleasant reading for investors, the sentiment was not shared by campaigners. This highlights something that I’d need to consider before investing today, namely the threat of a one-off windfall tax. This could certainly have an impact on the near-term performance of the BP share price.

Another thing I’d need to remind myself is that BP has no control over the price of what it produces. Indeed, the company made a point of stating that demand for oil and gas could remain volatile in 2022. Lower production and flat margins are also likely in the current quarter. Again, this could prove a headwind for the BP share price.

Returning to dividends, it’s also vital to remember that payouts are never guaranteed. In fact, BP has been very inconsistent over the years in what it returns to shareholders. That could be an issue for me if I were overly dependent on the £80bn cap company for passive income. 

Better buy?

Contrary to many stocks, the BP share price is riding high in 2022. Up 17% year-to-date and almost 57% in 12 months, this is a perfect example of how profitable it can be for me to buy when no one else is. 

Seen purely from an investment perspective, I still think there’s a place for the stock as part of a fully-diversified income-focused portfolio. If capital gains were my chief concern, however, I’d easily choose this other stock from the FTSE 100 over the oil behemoth. I’m not buying today as I think a lot of good news looks priced in and I don’t see much room to rise from here.

The post Will the BP share price keep rising? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

Paul Summers 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.

Here, I’m going to look at why the share price is rising and whether it can keep climbing. I’ll also discuss whether I’d buy RDSB shares now.

Why has Shell’s share price risen?

There are a couple of reasons Shell’s share price has climbed recently.

One is higher oil prices. Recently, the price of oil has risen above $80 per barrel for the first time in three years. This price rise is the result of a supply and demand imbalance in the oil market. With the impact of the Covid Delta variant diminishing, demand for oil is rising. At the same time, supply is tight. Higher oil prices are obviously good for a company like Shell because they increase revenues.

Another is the shift back into cyclical stocks. In recent weeks, a lot of money has come out of the technology sector and gone into ‘reopening stocks’ such as banks, airlines, and energy companies. It seems the great reopening trade is back on (for now) and Shell shares are benefitting.

Can RDSB keep rising?

As for whether Shell’s share price can continue to climb, I think it’s certainly possible, although much will depend on oil prices.

It’s worth noting that recently, analysts at investment bank Goldman Sachs raised their short-term price target for oil to $90 per barrel. “While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts,” they wrote.

If the price of oil does keep climbing (and there’s no guarantee it will, of course) Shell’s share price could get an extra boost.

Should I buy Shell shares today?

I actually sold my Shell shares earlier this year. And while the share price has risen since I sold, I don’t have any regrets.

I sold RDSB for several reasons. One is that, in the long run, I think the company is likely to face structural challenges as the world transitions towards clean energy.

Another is that, with so many big investors now investing with more of an ethical/ESG focus and avoiding oil stocks, future share price gains could be limited.

A third is that Shell cut its dividend (by nearly 70%) last year. With the company’s long-term dividend track record gone, there’s more uncertainty over future dividend payments.

No recent developments change my view on Shell so I won’t be buying the shares today. The share price could keep rising in the near term, but I think there are better stocks for a long-term investor like myself to buy right now.

The post Shell’s share price is rising. Should I buy the FTSE 100 stock now? appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Edward Sheldon 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.

BP stock challenges

The pandemic slashed demand for oil. With worldwide travel bans enforced, the price of oil tumbled. Consequently, BP posted a $5.7bn loss for the year, compared to a $10bn profit the year before. This plunged BP stock to a 26-year low and forced the firm to slash over 10,000 jobs. BP Chief Executive, Bernard Looney described 2020 as “the most brutal I can remember in almost 30 years in this industry”. And the pandemic is far from over. Virus variants could mean new restrictions, something continually plaguing the travel industry in the past 18 months. Moving forward this could also place a lid on the growth of BP stock.

A longer-term challenge that BP must overcome is the shift to green energy. It has committed itself to net zero emissions by 2050, which means slashing oil and gas production. It plans to increase its renewable energy portfolio from the current 3.2GW to 50GW by 2030. Although BP could pull this off, I think it will be a tough switch for the firm. Susannah Streeter, a Senior Analyst at Hargreaves Lansdown, described this switch as “walking on a tightrope for the business”.

However, BP is reportedly making good progress towards the target of the sale of $25bn worth of assets by 2025. A $5bn divestment is expected this year. This is helping the firm reduce its net debt position by 20% while moving towards a green energy future. Bolstering the balance sheet and going green should help BP stock in the future

Moving forward

Although the pandemic hit it hard, there have still been some positives for BP. The reduction in the workforce led to its highest margin in 10 years. In addition to this, as my fellow Fool Roland Head pointed out, BP earnings are forecast at $10.5bn for 2021. That would make this the most profitable year since 2013.

BP is currently trading on a forward price-to-earnings (P/E) ratio of 7.5x with a healthy dividend yield of 5.4%.  Competitors ExxonMobil and Valero Energy are currently trading with P/E ratios of 11x and 13.3x respectively. This shows me that BP stock currently offers good value compared to its competition. The large dividend yield also makes BP stock a great income option for me, I believe.

Overall, I think BP stock could be a good addition to my portfolio. Only time will tell if the firm can make the switch to green energy, but I think that current value and encouraging revenue projections for 2021 outweigh this risk.

The post Should I add BP stock to my portfolio today? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

Dylan Hood 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.

On the whole, 2020 was a tough year for the BP (LSE:BP) share price. The markets crashed in March 2020, dragging the BP share price with them. The oil price, which normally correlates well with the BP share price, also slumped in March. However, as the oil price started to climb in May 2020, the BP stock price continued to slide.

Times have been tough for the BP share price

Investors might have continued to flee BP stock because big losses were forecasted (and eventually delivered) for the quarter ending 30 June 2020. The dividend yield on BP stock fell by half due to a cut in quarterly dividends from 0.1 cents to 0.05 cents during the pandemic. Perhaps then the ongoing price slide was due to the dividend yield being readjusted. But I think something else was going on.

As calls for climate change action intensified during the pandemic, institutions started to divest from oil & gas stocks in greater numbers. Governments promised that the recovery from the coronavirus would be green. There was a forecast from BP that peak oil demand will come in the current decade. Some have argued that peak oil demand has come and gone already.

All in all, BP shares have suffered from low oil prices, dividend cuts, and becoming increasingly out of favour as an oil & gas producer. 

A fossil fuel-free future

The BP stock price started to climb once its third quarter of 2020 results showed a swing back into profits. But, again, the price momentum stalled, even as the positive quarters continued to rack up in 2021. Even the 4% dividend increase and $1.4bn of share buybacks announced in the second quarter of 2021 results (which smashed expectations) have failed to really move the BP share price higher. 

I think BP is in a bit of a bind. In January 2020, before the pandemic, I thought BP might be a good buy because of its moves in clean energy and recycling. In the last year or so, BP has intensified its efforts to pivot towards a renewable future. It has set itself a net zero by 2050 target but has a long way to go. The investors that shun BP for its fossil fuel involvement will not be convinced just yet. After all, BP’s revenue will come from oil & gas for some time. 

BP brings expertise in managing large scale energy projects, and I am confident it can be successful in the transition. However, BP needs to go from next nothing to 50 gigawatts of renewables capacity in less than 10 years to hit one of its milestones. That suggests that the dividend might not increase much over the years and perhaps be more vulnerable, given BP’s ambitious spending plans. BP’s traditional dividend hungry investors might not fancy the stock because of this.

What’s next for the BP share price?

I do think the BP share price will move a lot higher if the company rotates away from oil and towards renewables, and the stock benefits from repricing as a clean energy company. However, this will take time. I am prepared for this and plan to hold BP stock in my portfolio for the long term. 

The post Here is why I am buying BP shares right now appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

James J. McCombie owns shares of BP. 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.

Earnings rebound

Earlier this week, Shell revealed a strong set of results. A sizeable recovery in earnings over Q2 was recorded, prompting free cash flow to soar. As one might expect, the BP share price rose by association. I wonder if there could be more to come in the next few days. The FTSE 100 titan is scheduled to provide an update on its second quarter on 3 August.

This is not to say that BP is a one-way bet. A rising oil price is beneficial, but last year showed how volatile a commodity like black gold can be. On a longer timeline, it seems inevitable that demand will drop as the cost of buying electric vehicles falls. BP’s need to adapt won’t come cheap either. This might help explain why the shares are still far below pre-pandemic levels.

On the other hand, one might say that a P/E of just 8 suggests these potential headwinds are already priced in, especially if the company ends up beating analyst expectations next week. Even if it doesn’t, I suspect income investors won’t lose sleep. BP currently yields a forecast 5.1%. 

Hot market

York-based housebuilder Persimmon (LSE: PSN) also reports to the market next month. While we don’t know for sure what its half-year numbers on 18 August will be, we do know that UK property has been white-hot of late as more people show a desire to continue working from home.

I think the near-term performance of PSN will depend greatly on CEO Dean Finch’s commentary. Any suggestion that the withdrawal of stamp duty relief will impact trading at Persimmon could knock the share price.

Then again, it’s not as if Persimmon’s valuation looks stretched. As I type, the shares trade on a forecast P/E of 11. That still looks pretty cheap considering just how highly the company scores on quality-focused metrics. A temporary loss of momentum probably won’t bother dividend hunters either. Based on analyst projections, Persimmon offers a tempting 8% dividend yield. That’s among the biggest that one can find on the FTSE 100. 

Supercycle beneficiary

A final FTSE 100 stock I’ll be following in August is copper miner Antofagasta (LSE: ANTO). 

I’m not alone in being bullish on this company. Earlier this week, broker Peel Hunt upgraded the company based on its belief that supply of the red metal will remain restricted in 2022. This should keep copper prices high, boosting profits at ANTO. Looking further ahead, a mooted commodity ‘super cycle’ brought about by the green revolution could bring forth a raft of new investors.

To be clear, this is still risky stuff. Demand for metals such as copper is often correlated to perceptions of global economic health — clearly beyond ANTO’s control. As this month’s update showed, production is also variable and can be affected by weather as much as well as grades and recovery rates. This may help explain why shares have lost momentum over recent months.

All that said, a P/E of 15 looks reasonable to me considering how financially sound ANTO appears to be. 

Interim numbers are due on 19 August.

The post BP isn’t the only FTSE 100 stock I’ll be watching in August appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Down 63% and yielding 6.3%! Is this FTSE 100 share a brilliant bargain?
• This 5.5%-yielding income stock’s at a 13-year low and cheap to-boot! Time to consider buying?
• Just how bad could it get for the BP share price?
• Down 65% but yielding 6%! Is this FTSE 100 dividend stock an unmissable bargain?

Paul Summers 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.

However, over the last few months, the stock has been climbing – increasing from 205p in November to around 300p today. Is this an early sign of the firm’s recovery? And should I be adding BP to my portfolio?

Why is the BP share price rising?

Like other oil companies, BP has little pricing power over its products. This proved to be problematic in the early days of the pandemic. However, the firm can mitigate its losses in several ways. In 2020, it cut its dividend, sold some sites and facilities, and focused on paying down debt to reduce interest expenses.

The latter of these, I believe, is a primary contributor to BP’s rising share price. By the end of Q1 2020, net debt stood at around $51.4bn and was dangerously close to the business’s total market capitalisation. But based on the latest updates, these long-term obligations have been cut by nearly 25%. As it stands, net debt is now around $38.9bn, with the management team expecting it to fall below its target of $35bn by the end of Q1 2021.

This is excellent news for two reasons. The first and most important, in my opinion, is it strengthens the balance sheet and increases BP’s financial health. The second is a reduced debt level increases the availability of excess cash flow to pay dividends and perform share buybacks. In fact, BP has already said that once the $35bn debt target is met, a minimum of 60% of surplus cash flow will be used to buy back shares.

Uncertainty ahead

BP is constantly under scrutiny for its impact on the environment and global warming. So I find it encouraging to see it has initiated a zero-emissions long-term strategy. Under this new direction, the firm has begun its transition to sustainable and clean energy generation.

But BP is one of the largest oil companies in the world. A complete transition like this will be a multi-year process, during which many complications could arise.

For example, producing and selling oil will be key to fund its shift into renewables. However, as electric vehicles become cheaper and more widely available, oil demand will likely suffer, as will its price, restricting BP’s access to internal capital, as well as affecting its share price.

Another risk that I’ve previously highlighted is renewable technology itself. Green energy generation methods may not be as profitable as oil is today. And consequently, the surplus cash flow used to reward shareholders may be significantly impacted.

The bottom line

There are still many unknowns regarding the company’s transition into renewable energy. But now that oil prices have returned to around $60/barrel, and the net debt level is close to being back under control, I believe that the BP share price can recover in 2021. Or at least it could be close to doing so. Therefore, I would consider adding it to my income portfolio.

The post Will the BP share price recover in 2021? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

Zaven Boyrazian does not own shares in BP. 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.

Yet ignoring the pandemic’s impact, the business appears to have done relatively well throughout that period. Petrofac became profitable, total debt dropped by 40%, and its liquidity grew stronger. So why is the Petrofac share price falling? And is this a buying opportunity for my portfolio? Let’s take a look.

What’s going on with the Petrofac share price?

Petrofac is an international services company for the energy sector. It designs, builds, manages, and maintains infrastructure on behalf of its clients, providing far more flexibility for leading energy companies like BP.

The Petrofac share price began falling in 2013 due to rising debt and weakening revenue concerns. However, the real problems began in April 2017. The serious Fraud Office (SFO) announced an investigation into the firm, which led to the immediate suspension of Marwan Chedid – the chief operating officer at the time.

Since then, things only appear to have got worse. In 2019, David Lufkin, the former head of sales, pleaded guilty to 11 counts of bribery. He was found guilty of another three counts in January this year, which ultimately led to the stock sell-off on Monday this week.

Why? Because beyond the reputational damage, this latest conviction led the Abu Dhabi National Oil Company (ADNOC) to suspend Petrofac from competing for any new contracts indefinitely. In other words, Petrofac just lost access to one of its key growth markets.

Is there a chance of recovery?

This is undoubtedly terrible news that will significantly impact the future of Petrofac and its share price. At least that’s what I think.

But it may not be a complete catastrophe. Due to the nature and complexity of Petrofac’s services, it has created some substantial switching costs for its clients. And so I don’t believe its existing projects will be significantly affected by this latest development in the scandal. Even ADNOC has agreed to allow Petrofac to continue its projects already under way before the recent suspension.

Also, as I mentioned before, the financials of the business have seen some improvement. Even with all the disruptions from Covid-19, Petrofac still managed to reduce its total debt by $200m thanks to its substantial cash reserves.

The bottom line

The investigation into Petrofac is still ongoing and may uncover more criminal activity in the future. However, these investigations typically last four years, indicating it may soon be over. At which point, the company will have to begin the long journey of repairing its reputation.

If successful, the Petrofac share price may recover to its pre-scandal levels over the long term, and thus potentially become a classic turnaround story. But for now, it serves as a good case study of how much damage can be inflicted when a business breaches regulations. It’s a risk all investors should consider, I feel.

Personally, I’m waiting to see how much impact the ADNOC contract suspension has on the business throughout 2021. So for now, I won’t be adding the stock to my portfolio.

The post Why did the Petrofac share price crash this week? appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Zaven Boyrazian does not own shares in Petrofac. 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.

Why did the Tullow Oil share price crash in 2019?

Tullow Oil is an exploration and production company for crude oil. Its share price suffered a major hit towards the end of 2019 that was only exacerbated by the pandemic. So what happened?

This seems to be a classic case of over-expectations by the management team. In the months leading up to the share price crash, the company had been hyping up two new oil fields in Guyana. What was supposed to be a dream discovery that would re-risk the petroleum system in the area quickly turned into a nightmare.

After further analysis, Tullow Oil discovered that both sites were contaminated with heavy oil. Why does that matter? Heavy oil is a highly viscous material, meaning it cannot easily flow to production wells under normal conditions. Therefore, drilling and extracting the tar-like substance is exceptionally difficult, which questions the financial viability of both these sites.

Then the pandemic created significant disruption for the entire oil industry and triggered a sharp decline in oil prices. Combining that with the heavy oil discovery resulted in the Tullow Oil share price plummeting by 95% between October 2019 and March 2020 – the largest drop in over two decades.

The road to recovery

In its 2020 full-year results, the pandemic’s impact on the business was made pretty clear. Total revenue fell by 19%, and the company reported a loss of $1.22bn. What’s more, due to a planned shutdown at one of its main sites, the total production forecast for 2021 fell to between 60,000 and 66,000 barrels for 2021. By comparison, 74,900 barrels were produced in 2020.

But there’s reason to be optimistic about the future. The reported loss wasn’t as big as 2019’s $1.69bn, and the firm’s debt levels are falling thanks to ongoing negotiations with its creditors. Also, oil prices are now back to nearly $70/barrel as travel restrictions are beginning to ease. And the management team has noted that its assets in West Africa are expected to significantly boost production as of 2022. 

Overall, this is undoubtedly good news for Tullow Oil, and consequently, its share price has returned to pre-pandemic levels. However, there is still a long way to go before completely recovering.

The bottom line

Personally, I think the Tullow Oil share price is already on track to return to 2019 levels. But due to the reduced production forecasts, this recovery will likely be a multi-year process.

For now, I’m going to wait and see how things develop throughout 2021, so I’m not adding the stock to my portfolio today.

The post Will the Tullow Oil share price recover in 2021? appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Zaven Boyrazian does not own shares in Tullow Oil. 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.

However, sometimes high dividend stocks are risky investments. There are a few firms on the Footsie right now with large dividend yields. Some of these firms face an uncertain future, unless the economic winds change direction. These stocks do not make a good investment case, despite the high yields. But, what if there is an exception?

I think there is. And it’s Royal Dutch Shell (LSE: RDSB).  

A top FTSE 100 dividend stock

At the current share price of 952p, Shell’s dividend for this financial year works out at just over 10%. However, going forward into the next financial year, if the 12p dividend per share remains the same, Shell investors can expect a dividend yield of around 5%. In this economic climate, that is pretty juicy.

However, a good yield is irrelevant if a company can’t pay it, and Shell’s 95% payout ratio is a concern. This means the oil major currently pays out most of its profits in dividends. But, the dividend per share has already been cut, share buybacks suspended, and cost-cutting measures imposed. Shell aims to deliver $2.5bn of savings by the end of 2022.

These actions mean Shell should be able to cover its future dividend commitments, even if earnings drop further. The oil major has a history of enticing capital by appealing to shareholders, and I expect this to continue. 

Shell’s undervalued share price 

Shell is currently selling on the Footsie on a price-to-earnings valuation of approximately 6. By comparison, peer BP‘s P/E is around 14. Apparently, the FTSE expects more from BP in the future. The lower ratio for Shell may reflect its recent earnings decline due to low oil prices, in addition to the share price drop. However, I think there are reasons for optimism.

Shell’s future focus is electric power generation via solar and other technologies, such as charging stations for electric vehicles. It sees a future for itself in renewables and is investing accordingly. Natural gas is also a priority and its integrated gas business is now the biggest sector in its portfolio, replacing downstream. It is also the largest supermajor liquid natural gas (LNG) producer. So, whatever happens with the oil price, Shell is well diversified for the future and is restructuring accordingly.

In addition, Shell is trading on a price-to-net-tangible-asset value of 0.28, meaning its stock is selling for less than the value of its physical assets. Notably, its assets have already been written down this year due to lower oil prices and smaller profit margins. Many pundits expect the oil price to improve. If this happens, Shell’s asset base will rise in value once again.  For me, the current share price represents significant undervaluation.  

I think Royal Dutch Shell is probably one of the top FTSE 100 dividend-paying stocks to buy in 2020. It has a juicy yield and there’s a future for its products. And, even better, it’s currently going cheap. But, for how long?  

The post A 5%-yielding FTSE 100 dividend stock I’d buy at a rock-bottom price appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Rachael FitzGerald-Finch owns shares of Royal Dutch Shell B. 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.

Fast forward to today, and Shell’s share price is actually lower than it was when I covered the stock in March. Did I get it wrong? Let’s take another look at the investment case for Shell.

Shell shares: can they recover?

Since my last article, the outlook for Shell has improved to a degree. Many countries are slowly coming out of lockdown and, as a result, demand for oil is picking up. China, for example, imported approximately 13m barrels per day (mb/d) in June, a record high.

As you can see in the chart below, the price of Brent crude oil has rebounded significantly since April.

Source: Trading Economics 

This rebound in the oil price is good news for Shell, as higher prices translate to higher cash flows and profits for oil companies.

Shell share price: an uncertain future

However, in terms of a recovery in Shell’s share price, there are a few other issues to consider. The first is Shell’s dividend. In the past, Shell was seen as a very dependable income stock that both private and institutional investors relied on for consistent dividends.

The situation is now very different. In its first-quarter results, Shell did the unthinkable and cut its dividend (for the first time since World War II). It was a significant cut too, with the payout reduced by 66%.

That kind of cut is likely to impact sentiment. No longer is Shell a rock-solid income stock.

Additionally, that cut says something about the challenges Shell’s facing. Analysts at Credit Suisse recently said the dividend cut is reflective of times to come, with “a harsh operating environment in the near term and slower recovery over the medium term.”

Another issue that could hold Shell’s share price back is uncertainty in relation to future oil demand. In the short term, people are less likely to travel internationally due to Covid-19. Meanwhile, the work-from-home trend means people may travel less on a permanent basis. This potentially translates to lower demand for oil. This could hurt Shell’s share price going forward.

Finally, it’s also worth thinking about today’s focus on sustainable investing. Increasingly, institutional investors are investing on a sustainable basis as that’s what their clients are looking for. Shell cannot be considered a sustainable stock. This means it may not generate the same kind of investor interest that it has in the past.

Are RDSB shares worth buying?

Shell’s share price could still rebound. However, a sustained recovery is far from guaranteed, given the many challenges the FTSE 100 company faces today.

I own Shell shares and will hold on to them, for now. However, I think there are much better stocks than Shell to buy today.

Instead of investing in an industry that’s set to experience challenges in the near term, I’d be looking at buying high-quality stocks in industries that are set for growth in the years ahead.

The post Shell’s share price is down 46% in 2020. Is now the time to buy? appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Edward Sheldon owns shares in Royal Dutch Shell. 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.