The bull case for BP shares

BP released its 2021 full-year results on February 8. The $12.8bn profit figure stood out immediately to investors, and the share price rose over 4% in the days after the release. By comparison, in 2020, BP saw a $5.7bn loss, the latest figure highlighting the turnaround for the firm. It also announced it had reduced net debt for the seventh consecutive quarter. In my eyes, both these factors highlight the managerial strength of the business, which encourages me to buy the shares.

These impressive results helped boost analyst expectations. JP Morgan increased its target from 590p to 600p, with Morgan Stanley also raising its target from 401p to 465p. As mentioned, the current price is just 378p. This gives me confidence that the shares could be a great long-term investment for my portfolio.

Considering the value of its shares, BP is trading on a forward price-to-earnings ratio of 6.6. This seems good value to me, especially considering the recent high profits. Competitors Shell and ExxonMobil are currently trading with 7.7 and 12.3 P/E ratios, respectively. This suggests to me that the current BP share price is undervalued.

BP share price: bear case

An obvious risk I see for BP shares is the global shift towards net zero and increasing ESG concerns among companies. Although BP has made a concerted effort towards cutting emissions, moving forward it’s going to take a huge amount of investment to keep these projects up. The firm already operates with very slim margins, which will come under pressure from outward investment.

In addition to this, the nature of BP’s business is very cyclical. At the moment, commodity prices are soaring, which is great for the business. However, if oil and gas prices crash, the company is in big trouble. This gives it an element of uncertainty in the long term.

BP announced yesterday its plans to divest its 19.75% stake in Russian oil giant Rosneft, following the Russian invasion of Ukraine. This is expected to result in a costly $25bn in exit charges, largely from foreign exchange. Whilst it has insisted this won’t impact any of its long-term strategic and financial targets, it’s definitely a worrying cost.  

The verdict

All things considered, I think that BP shares could be a great addition to my portfolio at its current price. The cheap valuation certainly looks appealing to me, especially considering the encouraging 2021 results. Therefore I would consider buying the shares for my portfolio today.

The post Should I buy BP shares for 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 in this article. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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.

Looking at what’s going on in the energy market today, I think there could potentially be further upside for oil stocks. Right now, the oil market is capitalising on rising demand, low global inventories, underinvestment in drilling rigs (due to the shift towards renewable energy), and high levels of geopolitical tension. This combination could push oil prices as high as $150, according to some analysts.

Here, I’m going to highlight some oil stocks listed on the London Stock Exchange. If I was looking to capitalise on higher oil prices by investing in stocks, these are some of the shares I’d consider for my own portfolio.

Oil giants

Let’s start with Shell (formerly Royal Dutch Shell). It’s the largest oil stock in the UK with a market-cap of around £150bn, and one of the industry’s ‘supermajors’.

Shell’s recent Q4 2021 results showed the company is doing well right now. For Q4, adjusted earnings came in at $6.4bn, up from $4.1bn in Q3. Meanwhile, adjusted earnings for 2021 amounted to $19.3bn versus $4.8bn a year earlier. On the back of these strong results, Shell raised its dividend by 4%. It also announced a share buyback programme of $8.5bn for the first half of 2022.

Shell currently trades on a forward-looking P/E ratio of about eight and sports a dividend yield of around 3.7%, so it appears to offer value right now. However, a risk to be aware of here is that many institutional investors are dumping oil stocks in an effort to focus on sustainable investments. This could put pressure on the share price in the long run.

Also in the large-cap space, there’s BP (LSE: BP). It’s another global oil giant with a huge market-cap (£76bn).

Now BP is in the process of transitioning to a renewable energy company. In 2020, it announced a major transformation programme in an effort to be a net zero business by 2050. However, today, BP is still very much an oil company and this means it can benefit from higher oil prices.

Like Shell, BP has seen a massive increase in its profits recently. For 2021, it generated a profit of $7.6bn versus a loss of $20.3bn in 2020. Meanwhile, operating cash flow jumped from $12.2bn in 2020 to $23.6bn in 2021.

“The company is a cash machine at these sorts of (oil and gas) prices and the business is running very well,” CEO Bernard Looney said last year.

At present, BP trades on a P/E ratio of around seven, with a yield of about 4.2%. This indicates the stock is cheap. However, the company’s transition to renewable energy adds risk to the investment case. This is going to cost the group a lot of money and there could be setbacks along the way.

A mid-cap oil stock

In the mid-cap area of the market, one company that looks interesting to me is Diversified Energy (LSE: DEC). Formerly Diversified Gas & Oil, it’s an established, independent owner and operator of producing natural gas and oil wells in the US. Its goal is to acquire and manage mature natural gas and oil properties to generate cash flows and growth for the long-term benefit of its stakeholders.

Analysts expect Diversified Energy to post a large increase in revenues and profits for 2021. Revenue for the year is expected to come in at $960m, up from $409m in 2021. Meanwhile, net profit is expected to amount to $195, versus a loss of $23.5m in 2020.

In a recent trading update, management was very confident in relation to the outlook. “As I survey our prospects, our outlook is as dynamic as I’ve seen,” CEO Rusty Hutson Jr said. “We enter 2022 with great momentum,” he added.

DEC shares currently trade on a forward-looking P/E ratio of about six so the stock is not expensive. It’s worth pointing out that the company has recently been embroiled in a row over the impact of its gas wells on the environment. This is an issue to keep an eye on.

Small-cap oil stocks

Turning to the small-cap space, one stock that’s worth highlighting right now is Gulf Keystone Petroleum (LSE: GKP), which has a market-cap of £443m. It’s an independent oil company that operates in the Kurdistan region of Iraq. Its main asset is the Shaikan Field – a giant oil field covering an area of 280 square kilometres.

GKP experienced a significant drop in revenues and profits when oil prices crashed during Covid-19. However, it’s now seeing a big rebound. For 2021, analysts expect revenue and net profit to come in at $315m and $155m respectively. That compares to $108m and -$47.3m in 2020.

Another small-cap oil stock worth highlighting is Jadestone Energy (LSE: JSE). It’s an under-the-radar oil and gas development and production company that has assets in Asia and Australia. It currently has a market-cap of around £420m.

A recent trading update from Jadestone was very encouraging. Not only did the group say it expects 2022 production to average 15,500 to 18,500 boe/d, a 30%+ increase on 2021 (with the majority being oil), but it also said that it may increase capital returns to investors.

“Based on our spending forecasts, we expect to generate material incremental cash in 2022 at current oil prices and premiums, and as a result, an increase in shareholder returns, either through increased dividends and/or share buy-backs, may be considered later in the year,” president and CEO Paul Blakely said.

While both of these stocks look cheap right now, it’s worth pointing out that small-cap oil stocks such as GKP and Jadestone tend to be high-risk investments. If oil prices fall significantly, these kinds of stocks can crash. Small oil producers also tend to have high levels of operational risk too. GKP, for example, has had some issues collecting recent payments. So these stocks are more speculative in nature.

The post 5 UK oil stocks to consider as energy prices skyrocket 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?
• Down 8.4% in a week! How far could the Shell share price fall?
• 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?

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.

I also believe that Shell’s recent decision to acquire the electric vehicle (EV) charging company Ubitricity is a sign of progress. As such, with demand potentially continuing to increase throughout 2021, is it the right time for me to buy Shell shares?

The deal to buy Ubitricity

Although it was only announced yesterday, and the sum has not yet been disclosed, I believe that the deal to buy Ubitricity is a shrewd piece of business. This is despite the fact that Shell shares fell 3% on the day.

Ubitricity operates the largest public EV charging network in the UK, and has also seen growth in France and Germany. I think the move to buy the company comes at a good time. Boris Johnson recently announced that the sale of new petrol and diesel vehicles would be banned from 2030. A number of car companies, such as Volkswagen and Renault, have also increased electric car production this past year.

This acquisition demonstrates Shell’s expansion into this fast-growing market. It also represents the company’s commitment to a net-zero emissions business. With climate change such a prominent issue within society right now, I believe this is essential for Shell’s longevity. This recent deal underlines a commitment to this future, and I think it will lead to gains in the Shell share price in the long term.

Further factors to consider

The firm’s third-quarter trading update was actually fairly positive, considering the challenging environment. Indeed, profits of $489m represented a significant improvement in comparison to the $18.1bn loss in the second quarter. Gearing had also fallen by over 1% over the period, due to net debt falling. With the fourth-quarter update due at the start of February, signs of further improvements may therefore be met by gains in the Shell share price.

Nevertheless, there are also negative factors to consider. For example, although the price of crude oil has been rising, lockdowns around the world may lead to falling demand, and tougher weeks to come. Joe Biden’s presidency may also lead to greater taxes, regulations, and restrictions on oil stocks.

Would I buy (more) Royal Dutch Shell shares?

Since news of the Covid-19 vaccine, the Shell share price has seen very large gains. This has reflected increased optimism within the oil market. But it’s still a long way away from its pre-Covid price. I already own Shell in my portfolio, and I’m tempted to add more. Although the long-term future of many oil stocks is in doubt, I believe Shell has shown sufficient commitment to renewable energy. This has included the sale of many of its assets, in order to invest further into renewable energy sources. The opportunity for further dividend growth in the next trading update may also boost investor sentiment. 

The post Royal Dutch Shell shares: is this a great time to buy? appeared first on The Twelfth Magpie.

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Stuart Blair owns shares of 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.

Royal Dutch Shell

Second-quarter earnings for the oil major were understandably very poor. In fact, after an impairment charge of $16.8bn, net income came to a loss of $18.1bn. On the face of it, these earnings paint a very gloomy picture. As such, it’s clear why the Shell share price has fallen nearly 20% since.

Nevertheless, upon further inspection of the earnings, there are a number of positives to take away. For example, on an adjusted earnings basis, the oil stock actually made $638m. While adjusted earnings exclude one-off items and can potentially just ignore all the ‘bad stuff’, it’s still a great sign to see the company making a good profit in this challenging quarter. It also had positive cash flow of $243m. Although this does not cover the dividend as yet, I’m still encouraged that it’s in positive territory. This was mainly the result of the company reducing capital expenditures.

Consequently, with average oil prices under $30 for the second quarter, I feel the worst may be over for Shell. With third-quarter results due at the end of October, a significant improvement could therefore be met with a sharp increase in the share price.

BP

After both cutting its dividend and announcing further investment into renewable energy, BP shares have fallen 13%. Of course, this does reflect the fact that the oil stock made an underlying loss of $6.7bn.

Even so, the news has not been all negative for BP. For example, the firm has managed to strengthen its finances by issuing $11.9bn in hybrid bonds. Net debt has also been reduced by over $10bn since the first quarter, and this has subsequently seen gearing reduce by 3% to 33%. This contrasts with Shell, where net debt increased by $3bn following the first quarter.

Despite the dividend cut, BP also has a greater dividend yield than Shell. In fact, the dividend is currently yielding around 6%, and there is no indication of a further cut. Instead, management has stated that once BP’s balance sheet has been deleveraged, it can start to return more money to shareholders through share buybacks.

Which oil stock would I buy?

Sitting at prices of 1,085p and 260p respectively, both of these oil stocks look very good value. As a result, I’ve actually invested in both Shell and BP, in anticipation of an oil recovery. If I were forced to choose just one however, I believe that BP offers the most upside potential. Although its transition to greener energy could hit profits in the short term, I think its long-term strategy should help its recovery prospects.

The post Royal Dutch Shell vs BP: which oil stock would I buy 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?

Stuart Blair owns shares in Royal Dutch Shell and 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.

It’s still early days, but that call is already looking good with news the company has achieved first oil at its Lancaster field in the Rona Ridge area, west of Shetland. The field — discovered 10 years ago — has been estimated to hold more than 500m barrels of oil. 

This is a huge achievement by Hurricane and its CEO Dr Robert Trice — who first proposed looking for oil in fractured basement reservoirs in the UK — and an egg-on-face moment for those who doubted it would ever happen.

For sceptics, this method was too difficult and costly to be worth the trouble, despite already being employed successfully elsewhere in the world.

According to the company, the combined flow from the wells hit the planned production rate of 20,000 barrels of oil per day during the 72-hour production test and marks the beginning of the development of Hurricane’s “considerable” resources in this area. 

What next?

Having got the Lancaster field into production, Hurricane will now be looking to ramp up its Early Production System (EPS) with the goal of achieving operating efficiency of 85% over the long term.

As previously indicated by the company, it expects efficiency of 45% over the first three months with an average production rate of 9,000 barrels. This will then rise to 65% and 13,000 barrels for the following three months.

It’s hoped the data acquired during the EPS phase will allow Hurricane to “optimise” locations for additional wells in the future.  According to Dr Trice, as much as “12 months of stable production will be required in order to provide a clear view of the reservoir” and allow Hurricane to plan for turning Lancaster into a full field development. 

I don’t hold. Have I missed the boat?

Not necessarily. Given that Hurricane’s shares are up 33% in value in less than a month, there were bound to be a few investors out there wanting to bank some profit and ‘sell on the news’. Indeed, the stock already appears to have lost momentum after initially spiking 7% this morning.

Nevertheless, I’m of the opinion Hurricane’s potential resources make it one for risk-tolerant investors to tuck away for a while. Let’s not forget that Hurricane believes Lancaster and another discovery (Halifax) have the potential to be a single, massive accumulation of oil and that it owns 100% of the licences covering this area. 

The same goes for the Greater Warwick Area — which features the Lincoln field and Warwick prospect — which is currently being developed through a 50/50 joint venture with Spirit Energy. 

Last week, analysts at Berenberg set a target price of 100p on the stock. That’s 66% higher than where it is right now. Naturally, it may be a while before it gets there but today’s update, coupled with the fact Hurricane delivered first oil when it said it would (and within budget) leads me to suspect it could hit this target within the next year. 

The £1.2bn-cap will hold a Capital Markets Day next month where it intends to reveal the results of initial analyses.

The post Today’s news makes me even more bullish on the Hurricane Energy share price appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Hurricane Energy. 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.

Improving performance

Wednesday’s AGM statement from Tullow Oil did not present any particularly revealing information about the business. Key to its future is likely to be how quickly it can reduce leverage, and by how much production will rise following the completion of Project TEN. Both of these factors could act as positive catalysts on the company’s share price, and on both fronts the company seems to be making encouraging progress.

In terms of debt reduction, Tullow Oil seems to be following an obvious path to improved performance. It is seeking to become a more sustainable and resilient oil producer at a time when the sector is experiencing fresh uncertainty. The $750m rights issue should go at least some way to solving its leverage issues, but further cost reductions and efficiencies will be necessary in order to improve the company’s balance sheet strength.

In addition to debt reduction, rises in production could also positively impact the company’s share price performance. As mentioned, Project TEN has been completed and this is forecast to significantly improve the company’s profitability. For example, earnings are due to return to positive territory this year and then record a rise of 61% next year.

Investment opportunity

Since Tullow Oil trades on a price-to-earnings growth (PEG) ratio of just 0.3, it seems to offer a wide margin of safety at the present time. However, within an Oil & Gas industry which has been severely devalued in recent months, larger and more diverse companies such as Shell also offer excellent value for money. For example, Shell has a PEG ratio of 0.4 and yet has a balance sheet which is already modestly leveraged, as well as cash flow that is strong.

Looking ahead, both stocks could experience a challenging period. The oil price may come under pressure if OPEC fails to extend its production cut beyond what is a relatively short space of time. And with demand growth continuing to be relatively sluggish, it would be unsurprising for oil to fail to rise significantly in future.

However, even given a difficult outlook, Shell and Tullow Oil could be worth buying. They offer bargain-basement valuations, upbeat growth potential and improving business models. Therefore, their share price falls since the start of the year seem unlikely to continue over the medium term.

The post Why Tullow Oil plc and Royal Dutch Shell plc are bargain buys appeared first on The Twelfth Magpie.

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• 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?

Peter Stephens owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. 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.