Oil Stocks: BP vs Shell

THE WEEK: Morningstar columnist Rodney Hobson on the latest results from oil giants BP and Royal Dutch Shell - and which shares he backed for growth

Rodney Hobson 7 November, 2016 | 9:58AM
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It was luck rather than good judgement that originally prompted me to buy Royal Dutch Shell shares (RDSB) rather than BP (BP.) but I can claim that it has been good judgement that persuaded me to stick with my choice. More confirmation came with third quarter figures from the two oil giants last week.

All is far from perfect at Shell. However, group income has more than trebled

BP’s net profit in the quarter was better than in the previous three months but was well down on the third quarter of 2015. The group remained loss making in the first nine months of 2016 while underlying profits, which excludes exceptional items, were less than half those of the same period last year.

I still worry about the dependence on operations in Russia, where the government shows little concern for international opinion and the legal system offers equally little protection for those who fall out of favour politically.

All is far from perfect at Shell, where the upstream unit continues to struggle despite showing some signs of improvement. However, group income has more than trebled so far this year and third quarter earnings were higher than last year and double those recorded in the previous three months.

Shell also said the integration of BG Group was "essentially done" and completed ahead of schedule.

Shell shares were the best performers on the FTSE 100 index on the day the figures were released, while BP fell back heavily. I’m not sure I’d be buying either at this juncture but if I had to choose it would definitely still be Shell.

As a Shell side line, the B shares as they are not subject to Dutch withholding tax, as the A shares are. I was therefore astonished when a reader holding B shares emailed me to say that he had opted for the scrip dividend and had been allocated A shares in lieu of cash.

I checked with Shell and was told that the scrip dividend is indeed paid only in A shares. This seems to be a bad choice for British investors to make. It means you will end up with a tiny number of A shares paying a lower dividend after tax and which may be disproportionate expensive to sell.

I therefore suggest Shell B shareholders to choose the cash dividend.

Brexit: The Saga Continues

If you think life just got better for investors with the High Court ruling that Brexit must be put to Parliament, then you are seriously deluded. Whatever the rights or wrongs of EU membership, the potential delay to triggering Article 50 and ultimately leaving the EU creates a vacuum in which we are ignored by other EU members but we continue to pay full whack.

I believe that the court ruling was legally and logically correct, in that only an Act of Parliament can undo a previous Act of Parliament. Referendums traditionally have no place in the British constitution. However, we lose another month before the Supreme Court rules on the Government appeal and it may well be January before the House of Commons votes on the issue if the High Court ruling is upheld.

While elected MPs may feel obliged to follow the referendum decision, the unelected House of Lords will have no such compunction. We could face a General Election followed by a new bill before Parliament, taking us into the summer or beyond.

The FTE 250 index leapt 200 points on news of the High Court ruling and the pound was also much stronger. Sheer wishful thinking.

Rather better news has been more data showing the resilience of the UK economy since June and the admission by Bank of England Governor Mark Carney that economic growth will be stronger than he previously thought.

So I remain confident despite, not because of, the High Court ruling. It is still right to buy London-quoted shares on any dips.

Ace of Trumps

The result of the US presidential election will probably produce a sharp fall in shares prices if Donald Trump wins and a steep rise if Hilary Clinton prevails. Any such movement will be short lived, as happened after the Brexit vote. Let the dust settle rather than act in haste.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC418.35 GBX0.00Rating
Royal Dutch Shell PLC B  

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.