Brent crude oil, the European benchmark, recently traded under $40 a barrel for the first time since early 2009. West Texas Intermediate crude oil, the U.S. benchmark, already broke the $40 a barrel level earlier this year. Both benchmarks are down approximately 65% since July 2014.
The shale oil boom in the U.S. was great for many oil companies, but this same boom led to a rush of oil into the market and has helped lead to this steep fall in oil prices. Effectively, the boom has turned into a bust. Now, the big issue is the OPEC nations – Saudi Arabia in particular – and their commitment to keep pumping oil regardless of the price.
Oil companies have resorted to slashing their capital budgets and scaling back investments in new projects. However, that might not be enough for some companies, which could be faced with more dividend cuts.
Nonetheless, a couple of British oil giants have been in front of the trend, prepping their balance sheets in case oil stays lower longer. But not all companies are created equal. Here are the two very different high-yielding European oil stocks:
High-Yield Oil Play to Sell: Royal Dutch Shell PLC (NYSE:RDS-A)
Shell managed to cut enough costs to get to where operating cash flow is covering its capital investments and 6.6% dividend yield. That dividend yield is very enticing, considering Chevron (NYSE: CVX) is offering a 4.8% dividend yield and Exxon Mobil (NYSE: XOM) is paying 3.8%.
However, don’t be fooled by the high yield. Shell could be in trouble. It initiated a $70 billion acquisition of BG Group – a fellow British oil and gas company – earlier this year. The big key is that Shell will be raising $20 billion in debt next year for the deal, which will put a strain on Shell’s already tight cash flow. Plus, Shell will divest upward of $20 billion in assets to get the deal done, which is poor timing on its part.
It is becoming a buyer’s market and the prices it will receive are going to be less than ideal. Shell has a history of making poor purchases, with various shale asset acquisitions that have turned out to be fruitless through the years.
High-Yield Oil Play to Own: BP PLC (NYSE:BP)
BP is offering a very juicy 8% dividend yield and is the best of bunch in the Brent business. BP has been a cost-cutting leader among major oil companies. It’s planning to cover all of its capital expenditure spending with cash by 2017.
A lot of the overhang for this stock has been reduced over the last year. This includes the deal to effectively settle all major liabilities related to the Deepwater Horizon oil spill. Now there’s certainty with the outflows from the settlements. So, if there is a positive for BP related to Deepwater, it’s that the company was forced to really rein in costs. This has helped them weather the fall in oil prices nicely.
BP’s dividend remains strong, as the cash outlay for the oil-spill-related payments will be spread out over the next two decades.
While the European oil supermajors offer higher dividend yields than their U.S counterparts, the Shell payout appears tenuous. The best play looks to be BP, which has one of the best cost structures in the business.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.