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Oil for income

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

If you look at a chart of the oil price last year, it would be easy to expect a gloomy set of fourth quarter results from the oil majors.

From a peak of $86 a barrel at the beginning of October, the price of Brent Crude dropped to a low of just over $50 a barrel on Christmas Eve - a drop of over 40%. Yet this hasn’t appeared to dent the profits of the world’s top oil producers. This week
BP announced its profits for 2018 were more than double that of the previous year’s, at $12.7 billion, up from $6.2 billion in 2017.

Oil for income

This follows a strong set of figures from three of the big five oil companies last week - Shell, ExxonMobil and Chevron. Shell was the first to announce fourth quarter earnings, posting its highest annual profit since 2014. US oil major ExxonMobil followed with earnings beating analyst expectations thanks to production growth, while Chevron reported fourth quarter earnings up from $3.1 billion in Q4 2017 to $3.7 billion in Q4 2018.

It appears the oil majors have learned how to adapt to a lower oil price since the price of Brent Crude fell from over $100 a barrel five years ago. Since Christmas though, the price of Brent Crude has risen to around $62 a barrel.  BP has said it is planning for a future of $60-65 a barrel, which seems a prudent strategy.

The company also announced a quarterly dividend of 10.25 cents a share, which is 2.5% higher than a year earlier. This will be welcomed by income investors.

Even with the rise of renewable energies, oil continues to play an important role in the world economy as people and goods are transported by air, land and sea using this key commodity.

While the development of electric cars continues to accelerate, it looks like the dominance of oil will be around for a while yet. This winter’s freezing polar vortex hitting the US Mid West has led to reports from some drivers that their electric car’s range can be cut by as much as half during the freezing temperatures. With the current range of lithium-ion batteries being most efficient at around 21c, until the technology improves, this does not bode well for the shift to electric vehicles in the northern parts of the US or most of Canada. 

With oil still firmly in the energy mix of most of the developed world, it’s no wonder that oil producers are popular with pension funds as a key source of income through the regular dividends they pay out. This year’s rise in the oil price to nearer the $60-65 mark, provides some protection for dividends not to be cut in the foreseeable future.

Currently the yield on BP shares is 5.7% and 5.9% for Shell. Though not guaranteed these yields are comfortably above the average for the FTSE 100 which is currently 4.4%.

If you like the idea of having some exposure to oil for its income potential, BP and Shell feature in the top 10 holdings of a number of our Select 50 equity income funds, such as the UK-focused Fidelity Enhanced Income Fund and Franklin UK Equity Income Fund. We recently interviewed Colin Morton of the Franklin UK Equity Income Fund which you can watch here.

Looking further afield, you’ll find Total and Shell in the Invesco European Equity Income Fund, while Total and Chevron join BP and Shell in the Invesco Global Equity Income Fund. You can also find Chevron in the JPM US Equity Income Fund.

Five year performance

(%)

As at 6 Feb

2014-2015 2015-2016 2016-2017 2017-2018

2018-2019

Brent Crude -48.6 -37.4

64.9

19.2 -8.0

Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 6.2.19, in local currency terms with income reinvested 

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.