Oil giantBP (LSE: BP) and banking behemothRoyal Bank of Scotland (LSE: RBS) have performedlike racing demonsover the past 12 months, competing in a hell-for-leather race to the bottom. This has certainly been hellish for investors, who have seen the value of their holdings fall by 16% and 23% respectively.
BP has done better than many inits stricken sector, for example, fellow major Royal Dutch Shell is down28%. RBS has done far worse than its rivals, however, with Barclays and Lloyds Banking Group down a relatively tame 5% and 8% respectively.
Barclays Bounce?
This suggests to me that Barclays for once is the victim of broaderforces rather than its own errors. The problem is that these broader forces take the form of the collapsing oil price, which sees no sign of reversing itself as yet, with WTI crude now trading below $40 a barrel. Thefinal hope of an immediate oil price recovery was dashed by the recent Opec meeting, where Saudi Arabia refused to consider cutting production unless all major oil producers did so, including non-OPEC members such as Russia, and that doesnt seem likely given thedesperate battle for market share.
I suspect the new yearcould bringfurther oil price falls and ratchetup thepressure on BPs dividend payouts, whichnow offer investors a yield of 6.90%. If oilstays cheaptowards the summer and beyond, the dividend may come under threat, despite managements public commitment. At some point, oilwill surely rebound.US shale drillershave shocked the Saudis by their resilience, but next year their remaining oil hedges will expire,and when that happens they may struggle to renew their credit lines, hitting supply.
The further oil falls, the more dramatic the likely rebound. BP should recover, but you may need nerves of steel and barrels of patience while you wait.
RBS Recovery?
2016 was the year that markets finally lost their patience with RBS. At todays price of 304p, it is well below its 52-week high of 414p. Yet recent Q3 resultshad the odd bright spot, including 952m attributable profits, up from896m in Q3 2014. There were also plenty of costs, including 847m on restructuring, aggravated by the 394m fall in investment banking profits, as it scales down the division.
Yet I see signs of hope. The Go-forward bank, based oncore NatWest and RBS retail and commercial banking operations, is going forward quite nicely, as RBS rebuilds itself as a more modest UK-focused banking operation. UK personal and business banking on mainland UK generates a healthy33% return on equity.
The recovery will take time. There is still no dividendbutinvestors are pinning their hopes on a resumption from the end of 2016. Most analysts assume this will trigger a share pricere-rating, although forecasts suggesting thatLloydswill yield 5.1% by next December have done little for itsshare price lately.
RBSwill no doubt have to weather more rate rigging and mis-selling scandals, but it is building its capital strength, winding down its exit bank, and can anticipatea more optimistic future. I expect both BP and RBS to recover, buttodays buyersmay not reap theirrewards until 2017.
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Harvey Jones has no position in any shares mentioned. 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.