2014 has been a very different experience for investors in BP (LSE: BP) (NYSE: BP.US) than it has been for their counterparts in Shell (LSE: RDSB). Thats because, while sentiment in BP has weakened somewhat and has caused shares to fall by 3% since the turn of the year, shares in Shell have rocketed by 9%. Does this mean, then, that BP is now better value than Shell? Or, is Shell likely to continue to outperform its rival oil major?
The main reason for the aforementioned weak sentiment in BPs shares is the potential effects of sanctions on Russia. Indeed, BP owns a stake in Russian oil company Rosneft, so it is clear that current and future sanctions could have a negative impact on its operations and, subsequently, on the bottom line of BP.
This is in stark contrast to Shells outlook, which is a lot more positive. While the company has struggled to deliver any meaningful profit growth in recent years, it is now fully focused on a new strategy of making the business leaner, more efficient and, ultimately, more profitable. Even though it looks set to take the company a little while to put its new strategy into effect, investors seemed to have backed the plan and the effects of this can be seen in the share price strength during the course of 2014.
Its perhaps of little surprise to find that BP trades on the lower price to earnings (P/E) ratio of the two stocks after its weaker share price performance in recent months. However, whats noticeable is just how much value both stocks currently offer investors. For example, BP has a P/E ratio of just 9.7, while Shells is still much lower than that of the FTSE 100, at 10.7 versus 13.7 for the wider index. This shows that there is considerable upside from an upward rerating for both companies moving forward.
Furthermore, both companies offer great yields, too. For instance, BP yields 5.1% and Shell has a yield of 4.6%. Both are expected to grow at a brisk pace next year, with BPs dividends per share due to be 5.3% higher in 2015 than they were in 2014 and Shells forecast to be 3.1% higher. This shows that there is likely to be real terms growth in the income component of total return for both companies over the short term.
While both stocks offer great value and strong, growing yields, it is Shell that appears to have the more favourable prospects. Certainly, BPs current share price includes a discount for the potential fallout from Russian sanctions, but the premium for Shell seems very reasonable when the bright prospects from its new strategy are taken into account.
Therefore, while both companies are worth buying, if you can only choose one then Shell seems to offer the better future prospects at what is still a very attractive price.
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Peter Stephens owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.