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Up by a fifth so far this year, the Shell (LSE: SHEL) share price has been responding to higher oil prices. With the possibility that oil prices could keep moving higher – potentially much higher – might this be the time for me to add some Shell shares back into my portfolio?
Oil has complicated economics, but simple economics too
When it comes to profitability for oil companies, there are a lot of factors to take into consideration.
For example, exploration can be hugely expensive and time-consuming. The fixed costs of infrastructure like pipelines and oil platforms can be massive. A lot of the operation cannot simply be turned off, even if demand falls or the price weakens.
But while oil can be a difficult business to assess, it can also be an easy one. Basically, when oil price tank, producers do badly – some more than others.
Conversely, when prices soar, you do not even have to be an especially good oil producer to make lots of money.
Shell is one of the world’s proven, long-established, and sizeable oil majors. So a surging oil price is good for its profit prospects.
Picking among oil companies
Of course, other companies match that description too. Fellow London-listed rival BP, for example, is also up 20% so far this year.
But look across the pond and oil shares have been doing even better lately. ExxonMobil shares have surged 28% so far this year, Chevron is up 30%, and Occidental Petroleum is up 43%.
Some people wondered why Warren Buffett had kept investing in Occidental in recent years. They probably have fewer questions now.
Why, though, have both BP and Shell shares – despite doing well – underperformed their US rivals so far this year?
I think part of the answer is that the two large UK drillers are less purely focused on oil than some rivals, with both having spent time in recent years building non-fossil fuels businesses.
The results have been uneven and oil has become more important again to them. Both slashed their dividend in 2020 – in Shell’s case, its first dividend cut since World War Two. It currently yields 3.2%.
By contrast, ExxonMobil has maintained its decades-long streak of annual dividend growth. Like other US oil and gas majors, it has stayed more narrowly focussed on fossil fuels than many British and European rivals.
If I wanted to buy oil shares right now, then, Shell would not be the one I would go for.
This might not be the top of the pricing cycle – but it’s not the bottom either!
For now, though, I will not be investing in the sector at all.
Could oil prices go higher? Could that help push shares like Shell and ExxonMobil higher? Yes and yes.
We do not know how high oil prices may go – but it could still be a long way up from here. Equally, though, we are almost certainly nowhere near the bottom of the current oil price cycle.
Buying oil producers is most attractive to me when selling prices are weak. That is definitely not the case now.
So I will keep my powder dry for investments in other sectors.
