Big Oil could be a gusher: Shell and BP are down – but not out! 

State Of Happiness is the title of the new Saturday night BBC Four drama series set in the Norwegian city of Stavanger, hit by sudden wealth when North Sea oil was discovered in the early 1970s.

The tale of investors in Shell in 2020 could be named State Of Discontent.

A global oil glut has compelled the company to cut its quarterly dividend by 66 per cent, a move that leaves millions of investors as well as savers in pensions and equity income funds suddenly poorer.

The reduction has been portrayed as a tragedy, since Shell had maintained payouts since the 1940s and was last year the most open-handed member of the FTSE 100. 

But a more reasoned reassessment is now taking place about the role that Shell and BP should play in portfolios.

Ben van Beurden, Shell’s chief executive, says that ‘the world has fundamentally changed over the last few months’.

The Covid-19 pandemic has wiped out one third of global demand for oil and even van Beurden cannot see when it will recover. 

Such is the shortage of storage for the oversupply that the US oil price temporarily turned negative last month – people were paying to have it taken off their hands.

Is this scenario the dress rehearsal for the post-oil era, as the world shifts towards alternative energy sources such as wind and solar power which can now be more economically produced? Or does the increase in the oil price this week hint at a plot twist?

For governments, tackling the economic damage wrought by coronavirus may be a higher priority than combating climate change. And the pandemic may prolong the need for oil and petrochemicals.

Despite the wish to eliminate single-use plastics, more throwaway plastic-based personal protective equipment will be required to get people back to work.

When commuting, people may prefer cars to public transport – especially if petrol is cheap.

Some will swap to a Tesla or another cool electric vehicle, but the favourite US suburban ride still seems set to be the gas-guzzling SUV. 

This would support the belief that, even on the most pessimistic forecasts, oil has still got another 40 years.

Meanwhile, BP and Shell – which are both committed to the net-zero emission goal – are already diversifying into more renewable energy sources.

They should see off competition in their core business from smaller players, as the exploration of new wells becomes less viable.

This could boost the oil price and, in fact, Goldman Sachs is now forecasting that West Texas Intermediate may reach $51 in 2021, against $24 at present.

Some analysts contend that the dividend cut has ensured Shell’s viability, and suspect BP might follow its rival’s example.

BP shares currently yield 10 per cent. The continuation of such liberality is not guaranteed, but the slimlining of this business may still offer rewards to investors.

Richard Hunter, head of markets at Interactive Investor, says Shell has saved $10billion by the dividend cut which, together with its other cost-cutting measures, will build a $30billion war chest.

Hunter deplores the outpouring of emotion over the payout: ‘This is good corporate housekeeping. Shell is still a strong investment proposition.’

Shell shares yield 3.5 per cent, which may not match BP’s bounty, but is generous compared with most other FTSE 100 shares, as dividends shrink. 

The cut in the Shell dividend leaves the long-suffering holders of equity income funds with yet another grievance, since these open-ended funds are heavily reliant on the oil majors: 55 of the 84 funds have a large stake in Shell, while 51 hold BP.

But since these funds – which are supposed to be a defensive play – fared badly in the stock market rout, there seems little option but to sit tight and hope that the managers can remedy the issue of the over-concentration of their holdings.

For those who now see Shell more as an opportunity for long-term growth than a source of income, JO Hambro UK Dynamic and Temple Bar investment trust are among the best buys.

Another option is a different version of an equity income fund such as FP Octopus Multi-Cap Income. 

Chris McVey, its manager, says: ‘We avoided the big income payers and have gone instead for relatively small companies with good balance sheets and sustainable earnings.’

These include Strix, world leader in kettle safety controls. This represents a bet on something that will not change in an uncertain future. 

We will be putting on the kettle for a cup of tea no matter what. And BP and Shell are almost sure to have a part in this, either supplying a form of energy – or the plastic bits of the kettle.