Is there any investment value in BP and Shell?

Reports Rebecca Tunstall - 27th July 2009

Almost all UK stock broker portfolios will hold either BP or Royal Dutch Shell as part of their core holdings. As we have recently found out it can take the markets a long time to recognise fundamental shifts in underlying valuations. If the value of a company is dependent on future discounted cash flows can we really be sure that BP and Shell will add any value to an investor in the future?

Greenpeace have highlighted in their July 2009 Rising Risks report that oil demand is peaking or has peaked and that we have reached the end of the period of “easy” oil. Independent oil companies like Shell and BP are being forced to seek out reserves which are expensive to access, due to limited access to the easier-to-produce oil reserves by state controlled entities. Did you know for example that 30% of Shell’s oil reserves are in Canadian tar sands? Once the oil price rises over $100 per barrel tar sands may become profitable, but with current legislative trends, it may be that renewables offer a better prospect. OPEC and IEA forecast in the medium term average oil prices at $61 per barrel. Thus 30% of Shell’s oil is not profitably extractable.

In hard financial times it is safe to hold onto old defensive stocks such as BP and Shell. Together they have outperformed the FTSE 100 in the last year, but their share price has underperformed the oil price. Is the market convinced of the investment case for BP and Shell? The scale of their commitment to new technologies, the pull back by BP from “Beyond Petroleum”, Shell’s pulling out of the London Array offshore wind park and the replacement of CEO, Jeroen van der Veer with Peter Voser, a far more traditional “oil” man suggest that BP and Shell may be stuck in a strategic rut. It may be time for investors to reassess the investment case to hold these stocks.

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