With oil at 2014 highs, is it time to buy BP and Shell?

Aneeka Gupta, associate director of research for ETF Securities, speaks to IGTV’s Victoria Scholar about BP and Shell earnings, as well as the outlook for oil prices.  

BP

BP reported first quarter (Q1) adjusted net profit of $2.59 billion, topping analysts’ estimates for $2.12 billion, sending its shares higher by around 1.5%. The UK oil giant kept its dividend at $0.10 per share, in line with expectations. Underlying replacement cost profits, a closely watched measure of earnings in the oil industry, hit $2.6 billion, up 71% year-on-year beating forecasts for $2.2 billion.

According to the company, it was the strongest quarter for the upstream business since the middle of 2014. This rally in oil prices up to highs not seen since 2014 helped BP to deliver a strong quarter earnings release. BP continued its share buyback programme, announced towards the end of last year, by buying 18 million shares for $120 million in the first quarter. However, it made a payment of $1.6 billion, in relation to the Deepwater Horizon oil spill in 2010 at the Macondo Prospect oil field in the Gulf of Mexico.

Shell

Investors failed to cheer at a 42% jump in Q1 profit for Royal Dutch Shell, as concerns about the oil major’s cash flow weighed on the share price.

Cash flow from operations hit $9.43 billion down from $9.5 billion in the same period last year. Meanwhile, Shell is yet to start buying back shares, despite a pledge to buy back $25 billion of shares by 2020. The company’s debt ratio hit 24.7% at the end of March (down from 28.3% last year), as it looks to reduce its borrowing to 20%.  In 2016, Shell acquired BG Group for $53 billion.

Are we at peak oil?

Oil prices have been on the climb, with Brent up more than 80% since the trough at the start of 2016. It is currently at highs not seen since 2014. Pierre Andurand, a noteworthy oil hedge fund manager, said it is ‘not impossible’ to imagine $300 oil.

Aneeka Gupta, associate director for research at ETF Securities, says oil prices are likely to be very volatile amid geopolitical concerns, especially regarding the Iran nuclear deal. She says Saudi Arabia wants to keep oil prices high ahead of the Saudi Aramco initial public offering (IPO), however the long-term price will ultimately be determined by supply and demand.

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