Shares in the FTSE 100s two big oil giants, BP (LSE: BP)(NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US), have certainly been under pressure since the price of oil started its slide. And with the price of a barrel stuck stubbornly below $50, it doesnt look like theres going to be any ease coming any time soon.
In fact, BP boss Bob Dudley has gone as far as to suggest we could be in for low oil price for up to three years, with no hope of getting back to $100 levels for a very long time. Thats good news for our fuel bills, but bad news for investors in BP and Shell. Or is it?
Commentators today are mostly focused on share prices, and both are down around 14% since their peaks of last summer when oil was still handsomely priced BP shares are trading at 445p as I write, with Shell at 2,234p.
But I think that is missing the best reason for buying BP and Shell shares now, and thats their dividends. Forecasts suggest yields from BP shares of 5.8% for this year and next, with yields of 5.5% and 5.6% from Shell for the two years. And those are amongst the best in the FTSEs top tier.
The risk is that projected dividend cover is pretty low. At Shell were looking at earnings only covering the cash by 1.11 times in 2015, but that would rise to 1.48 times based on a predicted earnings rise for 2016. At BP, this years dividend wont even be covered by earnings if forecasts prove sooth, but the City thinks well be back to 1.33 times cover by 2016.
I can see both companies wanting to keep their dividends going at current levels, especially after BP has fought so hard to get it back up after the Gulf disaster. They are both already engaged in serious cost-cutting measures aimed at keeping cashflow healthy, and both have plenty of assets that are still decently profitable even at todays low price.
If exploration and development work in high-cost oilfields, like the North Sea, need to be mothballed for a couple of years? Well, these are still very short timescales for companies like this its the ones working exclusively on high-cost fields that are the ones really at risk, not BP and Shell.
Buy during the bad times
Remember, it was in the depths of the credit crisis when mortgage lending had almost dried up that we should have been buying housebuilding shares. And its now, when the oil business is in the dumps that BP and Shell are surely providing the bigger opportunities.
If you buy now, take your dividends of 5.5% to 6% and reinvest the cash, I reckon youll be looking back in a few years at a nicely profitable decision.
Investing in dividend-paying FTSE 100 oilies when the so-called smart money is shunning them can help you to long-term Buffett-style wealth.
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