Time is running out to byBP (LSE: BP) andRoyal Dutch Shell (LSE: RDSB) at rock bottom prices and lock in theirhigh single-digitdividend yields, as the market is wising up to the fact that these majors are well placed to ride out a period of low oil prices.
Since hitting five-year lows at the end of September, BP and Shell have rallied hard. Since 24 September, BP and Shell have gained 18.0% and 17.8% respectively, outperforming the FTSE 100 by 10% over the same period.
And it looks as if this performance is set to continue. BP and Shell are showing no real signs of financial stress, managements have guaranteed dividends for the foreseeable future, and the two companies trading divisions are raking in the cash amid oil market turmoil.
Whats more, there are some signs that the price of oil could be set for a rally in the near future. Producers around the world are showing signs of strain and even low-cost producers such as Saudi Arabia arent making any money with the price of oil where it is today.
Positive outlook
BP and Shells sweeping spending cuts, job losses and cuts to capital spending have convinced many City analysts that Big Oils pain is coming to an end.
As a result, City analysts are now more positive on Big Oils outlook than they have been for 24 months. Upcoming production cuts around the world should help push oil prices steadily higher, while actions to cut costs have lowered the all-in cost of finding, drilling for and producing oil.
One analystbelievesthat this year, the breakeven price of Big Oil the level at which Big Oil makes a cash profit has fallen 20% year-on-year to $80 per barrel. A further decline in costs to $60 per barrel is expected by 2017.
So, even if oil prices remainwhere they are today,by cutting costs Big Oils financialposition is set to improve gradually.
Key advantage
As Shell and BP slash costs to improve cash generation from their oil assets, their trading divisions are reaping the benefits of a low oil price.
For example, BPsChief Financial Officer Brian Gilvary said in April that the companys trading armmade $350m more than normal during the first quarter of this year.Shells first-half refining and marketing profits jumped 93% year-on-year to $5.6bn.
Shell and FrancesTotalare the worlds largest oil traders, handling enough fuel every day to meet the needs of Japan, India, Germany, France, Italy, Spain, and the Netherlands.
Dividends secure
As BP and Shell adjust to the low oil price, and the market starts to view the companies in a positive light once again, investors are missing out on the chance to lock in the two companies market-beating dividend yields.
At present, Shells shares support a dividend yield of 6.7%. BPs shares yield 6.7%.
Still, this is just aroughappraisal of BP and Shell’s prospects. Before making a trading decision, you should conduct your ownresearch to see if the company in question is suitable for your portfolio and financial goals.
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Rupert Hargreaves owns shares of 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.
