James Moore: If you want to oil your finances, Shell is a safer bet than troubled BP

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The Independent Online

Shell. Our view: buy. Share price: 2306.5p (-21.5p)

When I expressed a reluctance to put BP in The Independent's 10 to follow a couple of years back, I was swiftly taken to task by a colleague.

"So what do you want, all the lights to go out? Until we come up with something better we need BP," she said.

And Shell for that matter. She had a point. So today I'm going to look purely at the investment case for these two companies and set any personal scruples aside.

Trouble is, you can't look at BP without environment scruples. Environmental issues continue to dog the company and could have a huge influence on its finances despite the vast compensation fund it has set aside. I'm referring to the Gulf of Mexico oil spill and the court battles over it.

It says a lot that the $7.8bn (£4.9bn) settlement with the largest group of claimants (it still needs to be ratified) announced over the weekend gave the shares only a mild fillip when they opened yesterday morning.

The deal helps, making the legal process BP faces simpler than it was.

But the US Department of Justice is still bringing a case, and so are other groups of claimants.

The company's recent results were favourable, and the fourth quarter finished with a flourish. Operating earnings came in at $5bn (£3.15bn) compared to $4.4bn in 2010, and a hike in the quarterly dividend to 8 cents from 7 cents came as a nice surprise.

BP's chief executive, Bob Dudley, argued that the company had turned the corner, and operationally he may well be right. Production will be flat in 2012, but BP has been busy – even in the Gulf of Mexico. It has five rigs now operating, with a further three planned for 2012 as long as the regulators agree (hmmm).

But the spill shows as a scar on BP's five-year share price graph. The company lost more than half its value almost overnight, and the Gulf of Mexico casts a dark shadow over the stock.

As a general rule, oil makes sense as an investment. Prices may ease from their current levels, but the world is too thirsty for this commodity for them to dip for an extended period of time.

That said, even at just 6.7 times full-year earnings with a prospective yield of 4.2 per cent, I don't think BP is cheap enough compared to the alternative to warrant investing given the huge uncertainty created by the spill.

That alternative is Royal Dutch Shell, on 7.9 times forecast with a prospective yield of 4.8 per cent. By contrast to BP, Shell's most recent results were anything but well received. In the quarter to December 2011, earnings before identified items were 18 per cent up at $4.8bn. But that was well below a consensus forecast of about $5.2bn, which had already been cut. The figures also compared unfavourably to what had been a strong third quarter.

On the plus side, debt was down and Shell also unveiled some rather ambitious growth targets which the market appears to have ignored as the shares have drifted downwards.

Shell had its own brush with the US authorities a few years ago when it was found to have mis-stated the true level of its proven oil reserves. The company was hit with huge fines and lawsuits and the scandal cast a very unfavourable light on its operations.

Since that time some of the murkier workings in its London Lubyanka have been cleaned up, and the unwieldy corporate structure has been modernised with a single London listing and an Amsterdam headquarters.

The targets the company set itself for 2009-2012 have been delivered. Shell is now calling for a 30-50 per cent increase in cash flow in 2012-2015.

This will be delivered by in excess of 60 new products and options.

Yes, Shell disappointed in the fourth quarter. But it is financially conservative, with a strong balance sheet which suggests that further dividend growth can be expected over the coming years. That forecast yield I referred to earlier could be poised to increase.

The share price has continued its downward drift in recent weeks, but I see it as a safer and stabler bet than BP. What's more, the yield is better and Shell can continue to outpace BP on that front. Take the weakness in the shares as an opportunity and buy.

By contrast, BP is best avoided for now, unless something miraculous happens and it manages to settle all its remaining legal issues.

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