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It has risen by a fifth so far this year, i A shell (LSE: SHEL) share price has been responding to higher oil prices. It is likely that oil prices will continue to rise – likely a lot more – could it be time to add more Shell shares to my portfolio?
Oil has hard economics, but also simple economics
When it comes to the profitability of oil companies, there are many factors to consider.
For example, testing can be very expensive and time-consuming. Fixed costs for infrastructure such as pipelines and oil fields can be substantial. Most work cannot simply be turned off, even if demand falls or prices weaken.
But while oil can be a difficult business to explore, it can also be an easy one. Basically, when oil prices tank, producers do poorly – some more than others.
Conversely, when prices rise, you don’t even have to be a top oil producer to make a lot of money.
Shell is one of the proven, oldest, and largest oil majors. So rising oil prices are good for their profit prospects.
Choosing between oil companies
Of course, some companies fit that description. A partner listed in London rivals BPfor example, it’s up 20% so far this year.
But look across the pond and oil stocks have been doing much better lately. ExxonMobil shares are up 28% so far this year, Chevron up 30%, too Occidental Petroleum increased by 43%.
Some people wonder why Warren Buffett stopped investing in Occidental in recent years. They probably have a few questions now.
Why, however, have both BP and Shell’s shares – despite doing well – underperformed their US rivals so far this year?
I think part of the answer is that the UK’s two biggest oil players are less focused on oil than some of their rivals, as both have spent time in recent years building non-fossil businesses.
The results have been uneven and oil has become more important to them. Both are cutting their dividends in 2020 – in Shell’s case, their first profit cut since the Second World War. It currently yields 3.2%.
In contrast, ExxonMobil has maintained its decades-long streak of annual dividend growth. Like other US oil and gas majors, it remains more focused on fossil fuels than many of its British and European rivals.
If I wanted to buy oil stocks right now, I wouldn’t go to Shell.
This may not be the top of the price cycle – but it’s not the bottom either!
For now, however, I will not invest in this sector at all.
Will oil prices rise? Could that help push stocks like Shell and ExxonMobil higher? Yes and yes.
We don’t know how much oil prices may go up – but it may still be a long way from here. Equally, however, it is probably nowhere near the bottom of the current oil price cycle.
Buying oil producers is more attractive to me when retail prices are weak. That is definitely not the case now.
So I will keep my powder dry to invest in other sectors.
